I think a good estimator would be the one taking into account the fact you're probably going to sell your place after some years to buy a new one, because you wont be able to have any cash if you don't.
One area where this might not apply is on VA loans; which applied to me. Currently in PhD program and was able to buy a house with a significantly lower mortgage (22% cheaper per month) than renting. Which eases the pain for wife and children during this time.
I don't agree this is true for the vast majority of situations. If you have the income to support the higher monthly payments, it's a viable option. I put down less than 10% and am willing to live with the higher rate and Mortgage Insurance in order to Not Be Renting. And if you can eventually pay the loan down a bit such that you end up with 20% equity, the MI goes away.
Median home price in Bay Area is what, $900K or so? 20% of that is $180K in cash. I don't know many people who have this, yet there are plenty of home owners here, and I wouldn't be willing to say that the majority of them made a bad decision.
There are certainly exceptions. When my partner and I purchased our place we only put enough down to avoid the extra insurance for down payments below 20%. With a 2.9% interest rate on our place, most indexes should perform better.
Having said that, the cause for my initial comment was just expressing my worry that if everyone was only able to put down a small amount of the total purchase price, then we're likely financing a lot of people who probably cant afford the place they're living in as soon as something small goes wrong.
Do we know how people defaulting correlates with their initial down payment size? I'm sure someone has studied this, but I have not been able to find any stats.
If you are a higher-than-average risk borrower and put down less than 20%, you get hit with both a higher interest rate than average risk borrowers receive, and you must pay mortgage insurance until you reach 20% equity. To add insult to injury, it is extremely common for the mortgage insurance companies and the mortgage servicing companies (not always the same) to simply keep charging borrowers the mortgage insurance fee even after the borrower reaches 20% equity.
Mortgage insurance payments end at 20% equity but you must ask for it to end. PMI automatically ends when you reach 22%. It also automatically ends if you are halfway through your mortgage schedule (e.g. 15 years for a 30 year mortgage), regardless of how much equity you have in the home.
recently i was pre-approved for a mortgage with just 5% down. this was for two loans actually, one is conventional 80% with typical interest rate, and one 15% 15 years loan at 6.5% interest rate. My plan was to pay off small one quickly and just use it to avoid selling current house before moving into new one. No PMI.
I think that's called a "piggyback mortgage." Yours is an extreme example (sounds like you'll pay off the 15 year loan within a year) but generally used when you can pay more initially because it's easier to pay off a loan early than to pay extra on your mortgage to get to 20% equity and end mortgage insurance payments.
If you can get a low enough interest, the piggyback can be preferable (to PMI) even if you're not going to pay it off early, you just have to do that math.
If you buy a house and pay off the mortgage, once you're older and don't want (or aren't able) to work any longer, you can live in your house for the cost of your utility bills. If you don't own a house, you still have to pay rent.
And routine maintenance and repair (e.g. complete roof replacements every 20 or so years).
Owning a home is super expensive even without a mortgage. So even going into retirement with a paid off house, you'll still want to set aside a decent pot of gold to keep that house "going" even aside from utilities (some of which are optional anyway, like cable/landline).
Alternatively, you could save the $200k down payment, invest it, and invest any difference in lower monthly expenses to end up with a pretty nice nest egg after 30 years, and live off the capital gains.
200k is downright ordinary in the Bay Area, unfortunately. But, yeah, some places have lower typical down payments, but rents tend to also decline commensurately with home prices. Roughly speaking.
Consider the purchase a hedge against faster house price growth. For the last 7 years, I've paid 1.09% interest on my mortgage (I'm in the UK; Bank of England rates are at 0.5%), while house prices have kept increasing . Which means that with repayment, I'm paying half as much as I would if I was renting. The rest is free for me to invest...
It very much depends on where you live, and how the markets develop what pays off. But I'm very happy I bought.
If you buy your house as an investment, it's a big risk. If you buy it as a hedge, and intend to stay long term, it's generally pretty cheap insurance against getting priced out of the area you want to live in.
The answer is always very much it depends, of course! And I'm in the process of purchasing a house myself, so I clearly don't think it's an insane decision.
It is, however, more complicated than the train of thought that says, "After 30 years, you'll own your own place, instead of having thrown away hundreds of thousands of dollars to a landlord."
In most large metro areas this is impossible for ordinary mortals without a liquidity event or a very high income.
We are still very much in a housing bubble being driven by insanely cheap money -- near-zero or even <0 effective central bank interest rates. The only places housing is affordable are places where there are no jobs.
Too few jobs from too few employers, especially specialized one like ours, is probably more accurate. And therefore a potential need to move to another area where there is a job needs to be factored in.
I don't understand what you mean. Paying off the mortgage is a big reason to buy vs rent. If you can afford the mortgage payment, then in 30 years, you own the house.
If this is impossible for ordinary mortals, how are ordinary mortals buying houses?
I ask as a small city homeowner, so forgive my ignorance of the metro area real estate world.
I don't think "ordinary mortals" in, for example, the Bay Area, consider their mortgage something they'll ever pay down completely. 30 years may as well be forever, and a lot of people I know refi over and over to stay on the treadmill. This is why in a market downturn, people end up underwater, losing the house.
Exactly this - if banks didn't think people could pay off mortgages, at least some chunk of the people, they wouldn't be offering them.
I agree that buying a house in central London (for example) is probably outside the reach of mere mortals, but I think that problem occurs several steps before the "paying off the mortgage" bit applies!
Many very interesting replies to my initial comment; it certainly is useful to see things from a different perspective.
You're going to be in a big surprise when your property tax bill comes to mostly fund trillion dollar public retirement pension accounts. Property taxes of typical city can run up to $200 or $400 a month.
But when you rent you have the option to move to another city if you don't like how your tax dollars are being managed. Especially when you are retired/unemployed and thus don't have to worry about living close to your job. You don't even have to move far necessarily depending on the type of tax you are trying to avoid.
Moving is a very disruptive life change, becoming more disruptive the longer you have been at your current location. It isn't something to be undertaken lightly, so it would probably take a significant move in property taxes to induce one to move.
Moving isn't very disruptive for me. Since 1995 I've moved once every couple of years and have lived in 6 states and 12 cities. Working remotely has made this super easy.
First, you are the exception. Second, moving frequently actually makes it less disruptive to a point because you are not sinking deep roots in one particular area.
Really!?! That seems pretty low. Is there a different rate if you live in your house? Even though I don't like property taxes I think that without fewer individuals would own their house in the US since corporate ownership of houses would have a lower cost.
One thing you can do while still somewhat physically able, or perhaps with getting help from neighbors, is a large garden.
Right now I'm living with my father, and we have some neighbors who moved here after Hostess died. They have a big garden, which my father and I help with in various ways; they get a lower cost of living, we get wonderfully fresh veggies.
Just to jump on... houses require maintenance. About 1% of the house value per year (roof needs replacing, hvac needs fixing, etc etc). If you skimp on maintenance the value of the house declines, possibly a lot (a leaking roof or basement can cause serious damage over time).
I think this is true for basic maintenance. Repairing something broken or about to cause problems like a roof is necessary. Beyond that I've noticed that house price seems to depend more on location than overall condition. There doesn't seem much financial incentive for homeowners to update their house.
So basically if you make an investment, you'll be better off than not making one if everything goes well. I can agree with that.
But why a house? I could just as easily say that if you take a loan to get a McDonald's franchise, then once that's paid off you'll at least have that store. Or the same logic for any other investment.
And the counterargument would be that you don't want to be fully leveraged because there's some risk involved in that. In the case of a loan maybe something will go wrong and you won't be able to afford the payments. Or maybe a new opportunity arises and you don't want to live in that town anymore and need to sell, possibly at a loss.
Maybe I actually should go out and buy a house. I just get this feeling that I don't really fully understand all the risks involved in this decision.
Those aren't equivalent. Mortgage payments include principal as well as interest. Interest is only paid on the outstanding balance, not the full, current value of the house. Even at 3% APR, the mortgage payment is typically 2 - 3 times the amortized tax payment. The actual separation depends significantly on mortgage term, value financed, value movement since purchase, and homestead laws.
This tool was huge in helping me make a good financial decision when I was thinking about housing recently. Hopefully some people at the upshot are reading this, but I'd love the ability to save searches, and also see all the data in an excel like pivot table of some sort to see how the different variables all play together.
I bought a house 2 years ago. I bought it to "live in it" and not for "investment" (US East Coast for context).
The thing is that when you start buying houses/apartments/condos/townhomes to make money, that is when you could get into trouble.
Make no mistake though. Owning a home is very costly depending on the type of home and area. For example, my single family detached home costs me money for things like maintenance, repairs etc that come out of my pocket. Did I forget to mention "Property Taxes" ? In NJ, it can easily be over $1000 per month for a single family home worth 500K (yes it is not a typo. It is over $1000 per month). You are paying for all the schools and other stuff that you have access to.
So don't buy a home just for financial reasons. Buy a home if :
- You want your "own" place and not worry about landlord bullshit (i hated my landlord charging me bogus cleaning costs once the lease was over. fuck that)
- You are not looking to use the house as an ATM or credit card. Try to refrain from Cash out refinance type of offers. Don't get fooled into getting cash for another reset of your mortgage.
- You intend to live in the area hopefully for 5-7 years (ok things can go wrong but intention should be there)
- If something happens for the worse, you can still sell it (hint: don't buy in an area where it is hard to sell)
- Very important: Put at least 20% down. There is a reason this is preferred. It gives you instant equity which means if the price fluctuates a bit (7-10%) down, you are still positive in case you had to sell due to unforeseen circumstances. I know it is the American dream to own a home but people trying to buy with 0 down or even 5% down are inviting trouble in today's market at least. Try not to do that. Wait until you have the down payment.
Some more tips for rookie buyers:
Know the differences between buying say a condo vs a single family detached home. I personally don't like condos or even townhomes because of their stricter community rules/HOA crap that they charge you for. I was looking at a condo once which said that they don't allow outdoor bbqing unless you get permission. WTF. sorry, not for me. I want "feedom" to do things in my home. So for me, single family is the closest option. But for you it could be townhomes/condos for other reasons. So know the difference.
I don't see why living in a home and investing in it are mutually exclusive. The way I see it, my monthly housing payment is an investment in addition to a cost of living. Sure it costs more in maintenance, but you also get more customizability. You can paint the walls whatever color you like. You can tear the carpet up and replace it with hardwood or vice versa.
I agree. What I am saying is that don't buy a home just for the financial reasons. Of course, there is a value in building equity over time if you stay long enough in the house. But take that as an added bonus and not a must have requirement because this is exactly what burned a lot of people after the 2008 crash.
I disagree, I think you should buy them for financial reasons, just maybe not as financial investments. Over a lifetime of providing shelter for yourself, buying your property almost always works out better financially.
Even if you don't plan to do "investment" it makes sense to think twice about one of the most important financial decisions in your life.
Is not that easy, sometimes the house prices are decreasing more than you pay for rent. In this case it's a wise decision to wait until the market is more stable.
I wish they had also included a "how much per year will taxes rise %" column. 'cause in NJ it's over 5% a year. My town, for instance, has averaged 7% a year. That law that caps 2% a year in tax increases has so many exclusions that it might as well have been a suggestion.
I hear you specially if you are fellow Newjersian :). Property taxes are a big pain in this state and wondering where we are going with it. Hope you are in a good school district and you have kids. Otherwise it seems a waste to give so much money to the township.
This is a great case (for and against) owning a home.
I'd like to add this is also why HOAs are worth avoiding. Imagine owning your own home but losing the freedom to do whatever you want with it and now having to put up with HOA bullshit instead of landlord bullshit.
They can also take your home if you get behind on your HOA dues. And fine you for rules they can create on a whim (and take your home if you fail to pay fines).
The disturbing thing is that the number of HOAs and the % of cities they inhabit is growing rapidly. Many developers create HOAs during development to keep the area looking nice until all the properties are sold off (and as soon as that happens the HOA is run at the whim of whomever picked up the rains from the neighbourhood).
Ultimately HOAs are anti-freedom, but nobody bats an eyelid because in the US only "freedom from government" is taken seriously, while freedom from employers/companies/organisations is all but ignored as a social issue. It is disturbing.
I just hope that for anyone unfortunate enough to live in a HOA area, they have non-crazy/non-sleazy people running the HOA. I also encourage everyone to get involved in their HOA otherwise risk getting bonkers rules passed by some nutjob who moves in and wants grass within 2 cm.
Part of the reason I walked away from my last home (a townhouse) was the HOA/TOA.
I was deeply underwater, could not come up with the difference to sell, and the HOA threatened to fine me $100/day if I wanted to rent the place out. Tossed the keys back to the bank, have a nice day (disclaimer: this only works if you have enough income to weather a credit drought; don't take it lightly). Something interesting about the housing crisis was that so many people lost their homes, lending guidelines have been reduced to allow you to purchase another home after 3 years from a foreclosure date instead of the historical 7 years.
Next time I purchase in 2-5 years, I would never again purchase in an HOA. I have yet to have someone provide evidence that an HOA maintains or increases a property's value.
Sounds more like, don't get deeply underwater with a house.
HOAs are agreements between the tenants and each other. As I bought my house, I made sure that I agreed with the HOA. I've even looked at some neighborhood's HOA and decided to shop elsewhere because of it. Some HOAs are bad, some are good.
> Sounds more like, don't get deeply underwater with a house.
Right, I'll get right on controlling macro-economic systems.
> HOAs are agreements between the tenants and each other. As I bought my house, I made sure that I agreed with the HOA. I've even looked at some neighborhood's HOA and decided to shop elsewhere because of it. Some HOAs are bad, some are good.
Also, right. You have almost no control over the board of the HOA you join, and are at the mercy of others in your "community". At least with a local government, you have due process. You have none with an HOA.
> Right, I'll get right on controlling macro-economic systems.
Or put more than 5% down on a house. IIRC, 20% down was enough to weather the 2009 crisis for the majority of the country (aka: Not Detroit).
I know that some cities (like Detroit) had a particularly bad situation. But those cases are atypical. A big problem was the sheer number of people buying homes with very little money down.
Or, if you're gonna be getting a FHA loan and buying a property on _extreme_ leverage, understand the tremulous situation you're in and that you're severely at risk for being underwater should the market tank.
> Also, right. You have almost no control over the board of the HOA you join, and are at the mercy of others in your "community". At least with a local government, you have due process. You have none with an HOA.
HOA's are beholden to the conduct described in the HOA bylaws, which serves as the constitution / due process of the HOA.
I suspect parent poster's point is that the HOA board are not who you are accountable to. You are accountable to the HOA rules. The board enforces them. Most HOAs I've encountered are structured in a way that prevents boards from making significant changes to the bylaws. A good set of HOA bylaws require a super-majority to make major changes to key points.
If you weren't allowed to rent, was that also the case when you bought the house, or did that change during your ownership? It's hard to blame the HOA for enforcing rules that were available for your review at the time of purchase.
> If you weren't allowed to rent, was that also the case when you bought the house, or did that change during your ownership? It's hard to blame the HOA for enforcing rules that were available for your review at the time of purchase.
Most HOAs have a limit as to the number of units that can be rented out due to FHA/Fannie/Freddie GSE financing guidelines, as they want the complex to be owner-occupied primarily. Several people, unbeknownst to me, had purchased their units with the intent to rent them out, causing our limit to be reached before I had even purchased.
Sounds like you couldn't live within their rules then. Why rail against the HOA? Those provisions are there for a reason and it seems like you understood the reason.
If an HOA doesn't maintain or improve your property value, can you provide what purpose it serves over traditional local government (besides collecting dues for shared landscaping needs or common area maintenance)? I rail against unnecessary bureaucracy whenever possible, especially HOAs.
Serious question, why do you look to de-power the legislators at your local and state level? if you don't agree with them, find a state/city/county with policies and government you agree with. Unless you disagree with all forms of governance, in which case there is no point in discussion.
> Serious question, why do you look to de-power the legislators at your local and state level? if you don't agree with them, find a state/city/county with policies and government you agree with. Unless you disagree with all forms of governance, in which case there is no point in discussion.
I look to de-power HOAs, not local or state government. Government should be accountable; HOAs have been proven to not be.
Some counties don't have much traditional local government. Some cities are very well regulated, and HOAs aren't needed. Others are just unregistered unregulated cities for the most part.
I mean, most counties do provide police and school services. But my HOA resolves parking issues (including the cost of towing vehicles), as well as pothole repairs. In another nearby county, the county presumably covers those sorts of issues and HOAs are much smaller (the other county is more urban)
> It's hard to blame the HOA for enforcing rules that were available for your review at the time of purchase.
That's kind of an odd assertion. You can't blame the HOA for the HOA rules? Sure, you have some responsibility yourself if you didn't read over the rules, but that doesn't mean the HOA rules can't in themselves be terrible.
> I'd like to add this is also why HOAs are worth avoiding. Imagine owning your own home but losing the freedom to do whatever you want with it and now having to put up with HOA bullshit instead of landlord bullshit.
HOA bullshit is along the lines of "Don't paint your door pink", or "Consult with HOA / Neighbors before putting up a fence". Even a hugely regulatory HOA is more free than a landlord.
> Ultimately HOAs are anti-freedom, but nobody bats an eyelid because in the US only "freedom from government" is taken seriously, while freedom from employers/companies/organisations is all but ignored as a social issue. It is disturbing.
HOAs are the smallest government that people are going to be potentially a part of.
Maybe I prefer living in an area that cares about a somewhat consistent architecture? Maybe I like living in an area where the HOA mows the lawn for me.
If you don't like HOAs, then don't get a house with an HOA. But for me, I lose "freedoms" I never really cared about (I don't want a pink door, I'm not going to lease my property short-term with AirBNB), and gain assurances (such as no Hookers / Sex Orgies next door as my dumbass neighbors screw themselves with AirBNB).
Finally, and this sounds a bit classist... but HOA dues serve as a barrier to keep selfish people like you away from the neighborhood. This is definitely the case for gated communities, although it isn't a major concern for me personally.
But snooty people want to live with only other snooty upper-class people within the neighborhood... and HOA dues serve as a non-trivial barrier for them and their community.
There are plenty of reasons that make HOAs beneficial to the neighborhoods they serve.
I agree with you. I'm sure there are good/bad HOAs, but I think they are much easier to change through the yearly elections/bi-anunual meetings than individually dealing with a problem neighbor.
Not sure why you were downvoted, but it is a valid opinion and one I share. HOAs are excellent for some people (me included) and not excellent for others. I don't get why people have so much HATE for HOAs when they can just as easily choose not to live in them. Just because they don't work for your lifestyle doesn't mean they are a bad thing.
The problem is you are probably going to live in your house for 5 to 30+ years. There is not guarantee the sane governance your HOA provides today won't be insane next year.
I am thinking of buying a house in the coming years and plan to avoid HOAs like the plague.
As others have said, there are sane ones and insane ones. Sometimes you need them. Where my dad lives, for example, there's a shared private road and the maintenance/plowing of that has to be managed. One could certainly not live there, of course, but you really have no way to avoid some sort of HOA in that circumstance. (In general, it's probably also true that the more space and separation you have from your neighbors, the less need for a HOA to mitigate conflicts and standards. Tall fences make good neighbors and all that.)
An HOA could be structured such that it only has the power to do specific things. Need the HOA to maintain a shared road? Structure it such that maintenance of that specific road is all it can do, and all it can raise fees for. Also set it up so that changing the HOA responsibilities requires a unanimous vote.
The real trick to having a good HOA is probably structuring it such that it cannot morph into a bad one.
HOA's really aren't that evil. Here's the benefit: You know those neighborhoods where every home has a truck on bricks out front? Where you're trying to sell your home but the guy to the left and right of you have let their garden go? HOA's solve those issues.
We live in an HOA and the people are super chill - we're busy working to build a nature walk through a communal area.
Yeah they can get a little gossipy and there are as many horror stories as there are bad neighborhoods in the country, but in most cases they actually help, especially for lower income neighborhoods. My in-laws live in a more rural area with an HOA and while they're always complaining about the gossipy nature of it, the alternative is clear: A few blocks outside the HOA some guy has turned his front-yard into an actual motorcross track and tears it up on weekends with dirt bikes.
I had a case recently with a neighbor running a business out of their home. At one point they had 30 customer vehicles parked out in the street and around the neighborhood. In my previous HOA-free area, we had a similar problem but had no recourse except to try to convince the county zoning commission to be bothered to do something -- we eventually had to move as the local homes each had 10-20 vehicles parked out in front.
In my current HOA neighborhood I sent an email and made a phone call and the problem was solved in a couple weeks.
My current house isn't part of the neighborhood HOA because the developer messed up the paperwork for several homes, and we're not required to be members. This only became apparent when we received a letter from the HOA asking if we wanted to join and "enjoy the benefits" of a well maintained community. We had been paying the HOA fees for 4 years before this notice arrived, be we declined to join. They've invited us two more consecutive years, but we'll continue to decline.
Our city maintains the roads, parks and school, the individual homeowners maintain the sidewalks. The HOA maintains the landscaping in two locations, and that's about it. I don't want the encumbrance of having to follow some insane HOA rules about paint color, or antennas, or such, so I'll pass.
I would never live in a neighborhood without an HOA or CC&Rs.
Yes, they are anti-freedom and for me that is a good thing. I want my neighbors to treat their property and shared spaces in a way that allows me to live in peace and keeps my investment safe. No, I don't want my neighbor to have the freedom to paint their house lime green.
As a fairly rookie home owner I can relate to all of this.
I'd like to add though that in certain markets (SF Bay Area) it's nearly impossible to buy something with 20% down for a new time home buyer. My first home I purchased with 5% down, and just purchased a second home with 10%, hopefully for the third one I'll be able to put down 20% - but with the prices here you'll be saving up forever to get to that down payment.
think of it this way. In Europe etc, you pay higher income taxes but then you get these benefits. In US, you pay a bit lower income taxes but then you pay these additional taxes like property tax. Did I mention that some states in US charge property tax even to keep a car ? (looking at you Virginia :)). But then we don't have things like VAT etc. So it evens out somewhere I guess. Except healthcare situation. That is a topic for a separate discussion.
There are roughly 3 governments every American is part of. Maybe 4.
1. Federal Government
2. State Government
3. Local Government (usually County level)
4. City Government (sometimes)
Property Taxes fund #4 and #3 typically. Sales tax (kinda like VAT) fund #4 and #2. Income tax fund #1 and #2. Obviously, it changes from location to location. Some states don't have property tax or sales tax.
Schools and Police are typically a function of #3.
Note that schools being supported primarily by local property taxes is how you consistently get bad schools in poor areas, which tends to be a self-reinforcing cycle.
Not at all. In the US, we fund the schools through a combination of property taxes and gambling, and local property taxes go to fund local schools, rather than being spread evenly across the system.
Without that system, it would be too difficult to maintain racially-segregated tiered government schools, and white people who had the ability would leave government schools altogether.
Not sure I agree with the downpayment math considering growth in Seattle and Redmond where I am is between 7.5% and 9%. 20% downpayment for a $750K home (modest here) would be $150k which could take you a few years to save during which you're watching your dream home's price pull away from you.
I hear you about the risk of being underwater and your proposed solution is to build up a pile of cash that you're prepared to lose if your home price drops below purchase price. But what prevents you from building up that same pile of cash after buying the house if you need to get out of the mortgage? You're going to lose it either way if you want to move and you're underwater.
Incidentally if you are interested in a zero down mortgage, Navy Federal is a great option, alternatively you can look at places like the NASA credit union which is easier to become a member of (no military affiliation required, IIRC you just join the NASA society or something like that).
You may have to pay PMI if you don't have 20% equity. This can cost you a lot of money over time - especially if it will take you years to get 20% equity. And it likely will take you a long time due to the fact that mortgages are structured such that you're mainly paying interest on the loan the first few years creating nearly no equity.
So if you buy a house with 10% down if may take you many years to get to 20% equity while paying PMI all the while. And exposing yourself to more foreclosure risk. If you don't have 150k (plus another 50k for buffer) liquid then you probably can't afford the 750k home and look for something cheaper or continue to rent and invest the difference between rent and mortgage to possibly stay ahead of the property values of your area.
The same cases where you would want to go with 10% down instead of waiting to get 20% (such as increasing home prices in the area), are probably the same cases where you can refinance in a few years and take advantage of the increased assessment value to get 20% equity so you can drop PMI.
Indeed - but now you are a speculator. There is no guarantee that the value will go up, that you will be able to refinance, that your credit will be any good then, that you will even have a job among a myriad of other things.
I don't believe the typical person should take on that type of incredible risk.
You are always a speculator when financing any portion of your house. You can lose your job in either scenario. By holding out until you have 20% down, you are speculating that the housing prices will not drastically increase in that time.
> I don't believe the typical person should take on that type of incredible risk.
If you can't afford it, you shouldn't do it. I'm talking purely about maximizing value by minimizing amount paid overall. Sometimes you will be better off waiting to get 20%, sometimes you are better off taking advantage of current market conditions. In both cases, there is the the chance that your decision ends up costing more than the other strategy, depending on how the market performs.
Nobody ever seems to acknowledge the possibility of another across the board 30% drop in prices all over the country. This is my main reason for not buying. I think another severe, deflationary recession is almost an inevitability. Apparently I'm almost alone in remembering that housing can go down a lot.
Only matters if you need to sell. Look at the market now, it fully recovered and then some in most areas. The only people that lost out were those that were forced to sell in a down market. Protip: Don't do that.
You're assuming the current price recovery is not a prolonged dead cat bounce. The next price event will be down, and then flat or declining for ages. There's no round two for the QE type events of the last ten years. Going forward Japan is the model. Assuming you don't get destroyed in a violent bout of deflation, you can anticipate near zero real price appreciation.
One day you and everyone else from ZeroHedge will be SPOT on. But as they say, markets can remain irrational far longer than you can remain solvent, or alive...
My bet is on technology continuing to drive our economy to new levels of productivity and prosperity, along with it bringing real wealth creation, wage growth and price appreciation for real assets.
Will there be corrections? Probably. Are we going to be Japan? Probably not, but if we are so be it.
> My bet is on technology continuing to drive our economy to new levels of productivity and prosperity, along with it bringing real wealth creation, wage growth and price appreciation for real assets.
Just like massive advancements in technology drove up asset prices in 30s America, or 90s Japan, or 1880s America for that matter ...
"20% downpayment for a $750K home (modest here) would be $150k which could take you a few years to save during which you're watching your dream home's price pull away from you"
No, the price would not pull away from you. With 20% down payment required to complete a purchase, real-estate prices would actually come down to an affordable level, like they used to be. The requirement would eliminate all the clowns with 0% or 3% down payments who buy houses they can't afford, jacking up prices for everybody else.
The model defaults to a 4% growth rate in home prices. If you want to assume a 7.5% growth rate, plug it in a few rows down from the down payment. The rent number will go negative, even with a 0% down payment.
But you will be assuming that Seattle maintains a 7.5% growth rate over your specified time period. (It would be nice for me, I'm in contract on a house in Wallingford.)
I don't understand your point about property taxes. If you are renting you are still paying those taxes, it's just included in the rent. If someone buys a house without figuring the property taxes into their monthly payment, then, well they are idiots.
Renting often makes it easier to be uninformed about local property markets and the costs of property ownership. Many renters simply think that they are paying for the right to exist in the property and that the landlord pays for maintenance, taxes, etc. out of the kindness of their heart.
Re: 20% down... You're completely and totally right. It's 100% the prudent financial move.
However there is a bit of a problem with market forces in this regard. No (or little) money down mortgages have become almost the norm. The average homeowner puts significantly less than 20% down. This inflates home prices for several reasons:
1) People can buy more expensive homes on less money, allowing land owners to increase prices
2) Mortgage rates/plans are now structured to cover for the higher risk quotient (even if you do the usual 20% down you're still paying for the idiot who bought a million dollar home with nothing down)
3) Potential first time owners are forced to buy less for their money, further inflating that specific market which has huge ripple effects into the more mature sectors (first time home owners are far more likely to sell their current home and now there is additional financial pressure to make a profit, etc. etc.)
4) People, wisely or unwisely, exploit these new conditions to "play" the real estate game
5) The market becomes less sane the larger/more expensive the home, as the higher prices (even normally) encourage people to put less down
And guess what... all of this just makes it harder to put 20% down on a home, further exacerbating the cycle. Especially when you're in a bidding war and someone is willing to outbid you because they're putting less money down (which is a terrible financial move, but one that happens all too frequently). Bidding wars are low key one of the biggest reasons people go into housing debt, they get caught up in a specific house and aren't willing to walk away regardless of how the finances have changed since they first looked.
There's a lot of economic intertwining here with QE, general interest rates, and the economy at large so I'm not going to profess to know what's really going on here, but the housing market is very close to "utterly f*@#ed" for the middle class with no foreseeable recovery. And that's not even getting into the pandora's box of how the new exploding rental market is also skewing the market heavily.
Quick thought experiment: How many people that are buying at 100k do you think have 20k in the bank? Now how many of those do you think have 20k to drop on a down payment? Now look at what 100k gets you in a modern metro area and cry yourself to sleep.
> And guess what... all of this just makes it harder to put 20% down on a home, further exacerbating the cycle. Especially when you're in a bidding war and someone is willing to outbid you because they're putting less money down (which is a terrible financial move, but one that happens all too frequently). Bidding wars are low key one of the biggest reasons people go into housing debt, they get caught up in a specific house and aren't willing to walk away regardless of how the finances have changed since they first looked.
Having gone through a 'bidding war' twice purchasing my last two homes, I can say this not really the case as in the market dynamics you describe the appraisers can't keep up with market value and usually therefor those contingencies are waived as a prerequisite by sellers. This means the buyer needs to come up with cash for whatever difference between sale and banks appraisal price. This in turn results in deals falling through because people didn't have enough liquidity so now the seller requires proof of liquidity and actually prefer offers with bigger % down payment, even if the actual offer is lower. For the same reason all cash offers often get accepted over higher mortgage backed offers, just because there's less risk for the seller of the deal falling through. But yeah, to your last point, buying a house in any hot market sucks and comes with lots of challenges, the first of which is overcoming the absurd prices.
Again it's important to understand that this site is comparing like-for-like properties. The rental rate for a property in NJ that would sell for $500k is going to include the taxes the property owner is paying. Landlords aren't going to service those taxes (or maintenance or whatever other costs there are) out of the kindness of their heart. They've built that into the per-month rent they charge.
Gosh man, consider Atlanta. My taxes are $1,200 A YEAR. I put next to nothing down for an FHA loan. I was more interested in getting into a home before prices rose too high, than instant equity, but you make a good point. I specifically avoided HOA communities for the reasons you mentioned. I don't think they keep property values high, on the contrary I think they keep property values artificially high!
This is interesting data to me, because it shows me that I made the right choice to buy instead of rent a few years ago. In the area I live (based on the limited looking I've done and talking to friends who do rent), it's not uncommon for rent to be higher than what I'm paying for my mortgage + insurance, for a smaller place.
I would like to see an similar interactive app for determining if I should lease or buy a car. :)
- Cars will always depreciate, houses will often _appreciate_
- Leasing is almost always the poorer choice, barring basically the one case where you know you will need a car for the lease term only (and will not be getting another car afterward)
Leasing is always worse unless you prefer to have new cars every 3-5 years. If you need a car for the length of the lease term only, it's better to privately buy a 5 year old Corolla/Civic for $12k and sell it 3 years later for $10k.
There's a lot of factors to determine whether it's better to buy or lease but the rule of thumb is usually: if you drive not more than 15,000 miles a year and like to get a new car every 2 or 3 years leasing is for you. If that's not the case it's almost always financially better to buy. This is if you're in the US though, European leases are usually differently structured and this rule does not apply.
Leasing a car is a way to get a car that you can't afford to buy; it's for people who want to trade more money so they can enjoy a nicer car. Financially, buying a car is almost always more sensible if you can afford it. Exceptions to this would be highly specific and a generalized app probably wouldn't be helpful.
I'm not sure who you're railing against. Plugging in your numbers to the linked post says you should only rent the Brockwell Dr. house if you can get it for less than $850/mo.
There are definitely differences in the property stock that's available for rental vs. buying--though the specifics doubtless vary depending upon what you're looking for and where you're looking. In general, it's probably fair to say that renting standalone houses with the expectation that you won't have to move--with the costs and hassle that implies--can be difficult.
Buying a house is certainly something of a financial bet and clearly makes you less mobile. On the other hand (barring foreclosure), nobody can force you to move and you have a lot more flexibility in what you do with the property. For most people, as time goes on, the ability to pick up and move to another city without too much thought becomes less important and having more stability in their residence more so.
I live in flyover country, and rented single family homes here with no problem until we finally bought a year ago. It's true that there's a smaller stock of rentals, but there are more than your example suggests. I'd bet that there are lots of rentals in Westerville, OH that aren't coming up in your search, because they are rented through other mechanisms (anything from Craigslist to a sign in front of the house to locally-specific websites). It's true that fewer people are looking to rent, because buying is more accessible to the median family here than on the coasts, but renting is absolutely a thing that people do.
Also, mortgage is REALLY not the only cost of home ownership. I own a house worth about $200,000. My mortgage payment is about 850/month, my taxes are about 550/month, insurance is 60, and I budget 300/month for maintenance. It would cost me 1600 to rent an equivalent house, so I'm paying more on a monthly basis to own than I would to rent. Some of that is equity, true, which is why we bought. On the other hand, when/if we sell, we'll be paying a realtor $12,000 for the privilege, so we'll have to live here awhile before the equity gains outweigh the transaction costs.
even if I'm missing half the rental market, that seems pretty illiquid to me, and again, Westerville is considerably larger than most American suburbs, if I want to keep my kids in the same school district, I don't want to be limited to picking between 8 landlords
-------------------------------------------
how old is your house?
how much of your maintenance budget have you actually used?
After the housing bubble I kept a close eye on rent/buy metrics and spent several years renting while watching many friends crash and burn after having bought. But aside from the financial aspect, it's hard to overstate the extent to which renters get treated like second class citizens.
When a housing situation goes south and your only recourse is to uproot and move, you're not exactly in an advantageous situation. I had the misfortune of renting from someone who more or less turned out to be a slumlord and whom I had to take to court to get my deposit back from after deciding to leave. The tenant laws were luckily very clear. A landlord needed to prove the condition of the property is what they said it was before and after, which in my case they couldn't since the damages they claimed were fabricated. But to my surprise, the judge, when considering the he-said-she-said nature of the dispute, ruled in favor of the landlord "by default", as she said, even though the law is very clear on where the burden of proof lies. I could have appealed, but by that point I had moved out of state so it wasn't worth the hassle.
When I eventually did buy a home, the lender required a letter from all of my previous landlords stating that I was a tenant in good standing, even from the slumlord, who I can assure you was not interested in doing me any favors. No amount of discussion with the lender could move them on this point, and it looked as if I was not going to be able to get the house. The situation was saved when, at the 11th hour, I quietly received the needed letter from the slumlord's wife, who was apparently more sympathetic.
The idea that the absence of personal letter from an indifferent slumlord could prevent me from buying property was insane, and the entire ordeal, including the court judgement, highlights the extent to which property owners are held in higher regard than renters, as the judge said, "by default". You'll find this to be true in so many situations...
Just bought a house, and this is why it's very important to shop around lenders. I had a great guy, but if he'd asked for this information I'd have said no I'll find another lender. Even if this meant I might loose the house. And unless you are 10 days or less from closing you can find a lender to work with in that time frame.
Edit: that isn't to say you didn't do your due diligence, just adding my two cents. You might have done a great job researching and still been F-d. It does happen.
This is a fantastic analysis, but one also needs to think about the less quantitative benefits of home ownership. Owning a home gives you equity in your community because your economic outcome is tied to the neighborhood. In fact, home ownership rate is tightly correlated with reductions in crime rate [0].
As a renter in SF, I feel more like a tourist than a resident -- I don't care very much about the schools my kids will probably never go to or a lot of the far off political issues that will probably never affect me. I'm a young programmer and don't really have roots here. I think it would feel really different if I owned my home.
Home owners, did buying change your sense of community?
Disclaimer: My company Open Listings (YC W15) is trying to make it simple and more affordable to buy a home [1].
I can say that it did. I definitely became far more interested in using my own agency to define a nice place to live. When I rented, if a guy 2 buildings over was robbed, that's somebody else's problem. As an owner, I'll call the police the moment I know it will help keep my area decent.
We're actually going through a mini-crisis where I live as young kids who grew up here are now turning into teenagers and starting to do teenager-y things. A few minor crimes have occurred recently and as a result of citizen interest, the police have been out in force and even made some arrests.
Keep in mind, this level of crime, which is a big deal in a decade here, was weekly where I rented, and I didn't rent in a bad area.
It's important to understand this isn't a comparison of "can I find an apartment that's cheaper than buying a house". This is a comparison of like-for-like housing units. Check your local market, what can you rent an entire house for? What's the mortgage for buying a similar house look like?
One thing renters often don't understand when making claims about the personal expenses buyers have to go through to maintain their property is that renters are paying for those things, it's simply amortized over the period the property is up for rent. The money has to come from somewhere, and it comes from the renters.
When a renter moves, there is $0 from their rent that they are able to capture and move forward to their next property. While an owner can sell their previous property and carry forward their equity. To make an analogy, it would be like a renter being able to turn a $1000/mo rent into a $500/mo rent simply by having paid all the rent on-time at their previous place. This doesn't happen with renting, but it happens with buying, where a buyer can carry equity from a previous home into the purchase of a new one and turn a $500,000 loan into a $250,000 loan (assuming the equity they're carrying forward is worth 50% of the loan amount).
The length of time you will live at a place is also unimportant. You always need to live somewhere. Suppose I need to start housing myself at 20 and die at 90. I need to sort out shelter for 70 years. By buying a place you pay for it for 30, then get it for "free" (minus taxes and maintenance) for 40 years. With renting, you pay for shelter for all 70 years.
You can also rent out your property and make somebody else pay for it. Or rent out part of it for the same. In most rental markets, you can individually rent bedrooms for a total that exceeds the single unit rental price for the entire property.
What about markets where the rental fee is lower than the mortgage + taxes + maintenance? The property owner probably bought the property when property prices where lower, or owns it outright or is expecting to capture the delta when selling the property.
But rent here is so much lower than owning? For how long? If you purchase a home now, your 30 year mortgage will cost you the same per month for 30 years (or less if you pay off principal early). Thus a $2000/mo mortgage today will cost $2000/mo in 30 years. While rent only goes up -- usually with inflation. It's likely you'll be making more money in 30 years, so while renters will continue to pay the same share of income on rent, owners will not, their share of income for shelter decreases over time.
The local property market has to be extremely strange for decades for buying to ever be a worse idea than renting over the long-run. There are some advantages to renting, but they're very rarely, if ever, financial over the long-term.
In a way, you're always paying "rent". If you buy, you pay rent to the bank (principal and interest) for 30 years and rent to the government (property taxes) forever. You also pay utilities and insurance, maintenance and improvements. Homeowners tend to spend money on renovations and stuff, which is a hidden cost.
Then there is the psychological cost of ownership, which to me is a mental burden knowing I have debt.
The way I see it, there's no such thing as ownership. You're always paying someone. Suppose you own your house free and clear - can you paint your house pink? Can you have a collection of junk cars on your front lawn? (The neighbors will complain.) Can you build a patio? (Not without a permit.) Can you blast music really loud?
I recently bought a mortgage note (which makes me the lender) and let me tell you, as much as the homeowner thinks she owns the property, in my mind I have all the control.
Just my two cents, from the perspective of being a lender and a landlord. And yes, I rent.
To me, the only time it old make sense to buy a house is if I would buy it as an investment. Or if I have a family and the price is right. Personally, I value flexibility and less stress.
> To me, the only time it old make sense to buy a house is if I would buy it as an investment. Or if I have a family and the price is right. Personally, I value flexibility and less stress.
You are comparing two different kinds of things, financial sense and the intangible sense.
Over a lifetime, renting almost never makes financial sense.
Renting can have some benefits, but they tend to be intangible ones.
I agree with you 100%, thanks for pointing this out.
Some intangible benefits do translate to financial benefits, though. Like as a homeowner you are more likely to pay for costly renovations. And this is a guess, but people tend to buy a more expensive place than they would rent. And renting closer to places you want to be might save money in travel, commute, etc.
> Like as a homeowner you are more likely to pay for costly renovations.
Renter pay for those costs also. The money has to come from someplace. It's simply amortized over a longer period. For a property owner they have to swallow it at once.
It's a really common misunderstanding on the part of renters that they believe their rent only covers the right of existing in a property. It covers all the costs of the property owner (and likely makes them a little money extra).
However, let's suppose you're in month-6 of a 1-year lease and the owner decides to renovate the roof or something. You're protected from paying for that until your lease is up. But this is one reason why rent goes up over time. You, or the next tenant will eventually end up paying for these things.
I made the decision to buy my first house a year ago and just closed on it two weeks ago. For me it was less about the cost, although that was the genesis of the idea. I lived in Northern Virginia and paid $1,700 a month for a basic two bedrooom, 25 miles from DC. When my complex told me they would raise it soon to $1,800, I said enough. I moved to Atlanta and found rent in a better place, better amenities, etc. for only $1,100. I knew buying a house would be cheaper in the long term, but what really did it for me was the oppressive rental companies. My lease forbade people from staying at my apartment for more than 3 days without being added to the lease. Traffic and parking was horrible. Noise was horrible. What really pushed me over the edge was the constant having to be on guard from the ever present, ever spying leasing office.
I now pay only $130 more per month than I did living in an apartment, but it's the freedom that I think is the real benefit of buying a home. That and triple the space...
One more thing... I was quite adamant that my home not be in an HOA community. I'm worried less about artificially inflated property values, and more concerned with personal freedom. There are a lot of rules and laws on the books with the county and city as it is, not to mention the state. No one should have a bunch of nanny neighbors trying to control each other. Not living in an HOA gives me, the home owner, the most power and control.
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[ 3.4 ms ] story [ 218 ms ] threadMedian home price in Bay Area is what, $900K or so? 20% of that is $180K in cash. I don't know many people who have this, yet there are plenty of home owners here, and I wouldn't be willing to say that the majority of them made a bad decision.
Having said that, the cause for my initial comment was just expressing my worry that if everyone was only able to put down a small amount of the total purchase price, then we're likely financing a lot of people who probably cant afford the place they're living in as soon as something small goes wrong.
Do we know how people defaulting correlates with their initial down payment size? I'm sure someone has studied this, but I have not been able to find any stats.
http://www.thetruthaboutmortgage.com/median-down-payments-ha...
http://www.consumerfinance.gov/askcfpb/202/when-can-i-remove...
Also ignores HOA dues (if the home is a condo).
If you can get a low enough interest, the piggyback can be preferable (to PMI) even if you're not going to pay it off early, you just have to do that math.
Owning a home is super expensive even without a mortgage. So even going into retirement with a paid off house, you'll still want to set aside a decent pot of gold to keep that house "going" even aside from utilities (some of which are optional anyway, like cable/landline).
It very much depends on where you live, and how the markets develop what pays off. But I'm very happy I bought.
If you buy your house as an investment, it's a big risk. If you buy it as a hedge, and intend to stay long term, it's generally pretty cheap insurance against getting priced out of the area you want to live in.
It is, however, more complicated than the train of thought that says, "After 30 years, you'll own your own place, instead of having thrown away hundreds of thousands of dollars to a landlord."
In most large metro areas this is impossible for ordinary mortals without a liquidity event or a very high income.
We are still very much in a housing bubble being driven by insanely cheap money -- near-zero or even <0 effective central bank interest rates. The only places housing is affordable are places where there are no jobs.
Too few jobs from too few employers, especially specialized one like ours, is probably more accurate. And therefore a potential need to move to another area where there is a job needs to be factored in.
If this is impossible for ordinary mortals, how are ordinary mortals buying houses?
I ask as a small city homeowner, so forgive my ignorance of the metro area real estate world.
I agree that buying a house in central London (for example) is probably outside the reach of mere mortals, but I think that problem occurs several steps before the "paying off the mortgage" bit applies!
Many very interesting replies to my initial comment; it certainly is useful to see things from a different perspective.
Not trying to be nosy but did you make the move with children? (How did you help them adjust?)
Right now I'm living with my father, and we have some neighbors who moved here after Hostess died. They have a big garden, which my father and I help with in various ways; they get a lower cost of living, we get wonderfully fresh veggies.
But why a house? I could just as easily say that if you take a loan to get a McDonald's franchise, then once that's paid off you'll at least have that store. Or the same logic for any other investment.
And the counterargument would be that you don't want to be fully leveraged because there's some risk involved in that. In the case of a loan maybe something will go wrong and you won't be able to afford the payments. Or maybe a new opportunity arises and you don't want to live in that town anymore and need to sell, possibly at a loss.
Maybe I actually should go out and buy a house. I just get this feeling that I don't really fully understand all the risks involved in this decision.
The thing is that when you start buying houses/apartments/condos/townhomes to make money, that is when you could get into trouble.
Make no mistake though. Owning a home is very costly depending on the type of home and area. For example, my single family detached home costs me money for things like maintenance, repairs etc that come out of my pocket. Did I forget to mention "Property Taxes" ? In NJ, it can easily be over $1000 per month for a single family home worth 500K (yes it is not a typo. It is over $1000 per month). You are paying for all the schools and other stuff that you have access to.
So don't buy a home just for financial reasons. Buy a home if :
- You want your "own" place and not worry about landlord bullshit (i hated my landlord charging me bogus cleaning costs once the lease was over. fuck that)
- You are not looking to use the house as an ATM or credit card. Try to refrain from Cash out refinance type of offers. Don't get fooled into getting cash for another reset of your mortgage.
- You intend to live in the area hopefully for 5-7 years (ok things can go wrong but intention should be there)
- If something happens for the worse, you can still sell it (hint: don't buy in an area where it is hard to sell)
- Very important: Put at least 20% down. There is a reason this is preferred. It gives you instant equity which means if the price fluctuates a bit (7-10%) down, you are still positive in case you had to sell due to unforeseen circumstances. I know it is the American dream to own a home but people trying to buy with 0 down or even 5% down are inviting trouble in today's market at least. Try not to do that. Wait until you have the down payment.
Some more tips for rookie buyers:
Know the differences between buying say a condo vs a single family detached home. I personally don't like condos or even townhomes because of their stricter community rules/HOA crap that they charge you for. I was looking at a condo once which said that they don't allow outdoor bbqing unless you get permission. WTF. sorry, not for me. I want "feedom" to do things in my home. So for me, single family is the closest option. But for you it could be townhomes/condos for other reasons. So know the difference.
Is not that easy, sometimes the house prices are decreasing more than you pay for rent. In this case it's a wise decision to wait until the market is more stable.
I'd like to add this is also why HOAs are worth avoiding. Imagine owning your own home but losing the freedom to do whatever you want with it and now having to put up with HOA bullshit instead of landlord bullshit.
They can also take your home if you get behind on your HOA dues. And fine you for rules they can create on a whim (and take your home if you fail to pay fines).
The disturbing thing is that the number of HOAs and the % of cities they inhabit is growing rapidly. Many developers create HOAs during development to keep the area looking nice until all the properties are sold off (and as soon as that happens the HOA is run at the whim of whomever picked up the rains from the neighbourhood).
Ultimately HOAs are anti-freedom, but nobody bats an eyelid because in the US only "freedom from government" is taken seriously, while freedom from employers/companies/organisations is all but ignored as a social issue. It is disturbing.
I just hope that for anyone unfortunate enough to live in a HOA area, they have non-crazy/non-sleazy people running the HOA. I also encourage everyone to get involved in their HOA otherwise risk getting bonkers rules passed by some nutjob who moves in and wants grass within 2 cm.
I was deeply underwater, could not come up with the difference to sell, and the HOA threatened to fine me $100/day if I wanted to rent the place out. Tossed the keys back to the bank, have a nice day (disclaimer: this only works if you have enough income to weather a credit drought; don't take it lightly). Something interesting about the housing crisis was that so many people lost their homes, lending guidelines have been reduced to allow you to purchase another home after 3 years from a foreclosure date instead of the historical 7 years.
Next time I purchase in 2-5 years, I would never again purchase in an HOA. I have yet to have someone provide evidence that an HOA maintains or increases a property's value.
HOAs are agreements between the tenants and each other. As I bought my house, I made sure that I agreed with the HOA. I've even looked at some neighborhood's HOA and decided to shop elsewhere because of it. Some HOAs are bad, some are good.
Right, I'll get right on controlling macro-economic systems.
> HOAs are agreements between the tenants and each other. As I bought my house, I made sure that I agreed with the HOA. I've even looked at some neighborhood's HOA and decided to shop elsewhere because of it. Some HOAs are bad, some are good.
Also, right. You have almost no control over the board of the HOA you join, and are at the mercy of others in your "community". At least with a local government, you have due process. You have none with an HOA.
Or put more than 5% down on a house. IIRC, 20% down was enough to weather the 2009 crisis for the majority of the country (aka: Not Detroit).
I know that some cities (like Detroit) had a particularly bad situation. But those cases are atypical. A big problem was the sheer number of people buying homes with very little money down.
Or, if you're gonna be getting a FHA loan and buying a property on _extreme_ leverage, understand the tremulous situation you're in and that you're severely at risk for being underwater should the market tank.
> Also, right. You have almost no control over the board of the HOA you join, and are at the mercy of others in your "community". At least with a local government, you have due process. You have none with an HOA.
HOA's are beholden to the conduct described in the HOA bylaws, which serves as the constitution / due process of the HOA.
I had put 30% down (~$60K), and lost all of it, plus 2 years of payments. Chicago suburbs.
> HOA's are beholden to the conduct described in the HOA bylaws, which serves as the constitution / due process of the HOA.
You know how I know you've never attempted to sue an HOA for violating their bylaws?
If you weren't allowed to rent, was that also the case when you bought the house, or did that change during your ownership? It's hard to blame the HOA for enforcing rules that were available for your review at the time of purchase.
Most HOAs have a limit as to the number of units that can be rented out due to FHA/Fannie/Freddie GSE financing guidelines, as they want the complex to be owner-occupied primarily. Several people, unbeknownst to me, had purchased their units with the intent to rent them out, causing our limit to be reached before I had even purchased.
If an HOA doesn't maintain or improve your property value, can you provide what purpose it serves over traditional local government (besides collecting dues for shared landscaping needs or common area maintenance)? I rail against unnecessary bureaucracy whenever possible, especially HOAs.
I'll continue to push my legislators hard, both at the local and state level, to remove whatever power is available to them.
I look to de-power HOAs, not local or state government. Government should be accountable; HOAs have been proven to not be.
Some counties don't have much traditional local government. Some cities are very well regulated, and HOAs aren't needed. Others are just unregistered unregulated cities for the most part.
I mean, most counties do provide police and school services. But my HOA resolves parking issues (including the cost of towing vehicles), as well as pothole repairs. In another nearby county, the county presumably covers those sorts of issues and HOAs are much smaller (the other county is more urban)
That's kind of an odd assertion. You can't blame the HOA for the HOA rules? Sure, you have some responsibility yourself if you didn't read over the rules, but that doesn't mean the HOA rules can't in themselves be terrible.
THe house I bought is still considered ok for HOA fee ($30/month) but I know some newer communities are charging $100 or more per month.
I recommend buying a house that is may be in a community where HOA fees are low (hint: look for older homes in older neighborhoods)
HOA bullshit is along the lines of "Don't paint your door pink", or "Consult with HOA / Neighbors before putting up a fence". Even a hugely regulatory HOA is more free than a landlord.
> Ultimately HOAs are anti-freedom, but nobody bats an eyelid because in the US only "freedom from government" is taken seriously, while freedom from employers/companies/organisations is all but ignored as a social issue. It is disturbing.
HOAs are the smallest government that people are going to be potentially a part of.
Maybe I prefer living in an area that cares about a somewhat consistent architecture? Maybe I like living in an area where the HOA mows the lawn for me.
If you don't like HOAs, then don't get a house with an HOA. But for me, I lose "freedoms" I never really cared about (I don't want a pink door, I'm not going to lease my property short-term with AirBNB), and gain assurances (such as no Hookers / Sex Orgies next door as my dumbass neighbors screw themselves with AirBNB).
Finally, and this sounds a bit classist... but HOA dues serve as a barrier to keep selfish people like you away from the neighborhood. This is definitely the case for gated communities, although it isn't a major concern for me personally.
But snooty people want to live with only other snooty upper-class people within the neighborhood... and HOA dues serve as a non-trivial barrier for them and their community.
There are plenty of reasons that make HOAs beneficial to the neighborhoods they serve.
I am thinking of buying a house in the coming years and plan to avoid HOAs like the plague.
Participate in your HOA elections.
The real trick to having a good HOA is probably structuring it such that it cannot morph into a bad one.
We live in an HOA and the people are super chill - we're busy working to build a nature walk through a communal area.
Yeah they can get a little gossipy and there are as many horror stories as there are bad neighborhoods in the country, but in most cases they actually help, especially for lower income neighborhoods. My in-laws live in a more rural area with an HOA and while they're always complaining about the gossipy nature of it, the alternative is clear: A few blocks outside the HOA some guy has turned his front-yard into an actual motorcross track and tears it up on weekends with dirt bikes.
In my current HOA neighborhood I sent an email and made a phone call and the problem was solved in a couple weeks.
Our city maintains the roads, parks and school, the individual homeowners maintain the sidewalks. The HOA maintains the landscaping in two locations, and that's about it. I don't want the encumbrance of having to follow some insane HOA rules about paint color, or antennas, or such, so I'll pass.
Did they reimburse you for the 4 years of dues that you didn't actually owe?
Yes, they are anti-freedom and for me that is a good thing. I want my neighbors to treat their property and shared spaces in a way that allows me to live in peace and keeps my investment safe. No, I don't want my neighbor to have the freedom to paint their house lime green.
I'd like to add though that in certain markets (SF Bay Area) it's nearly impossible to buy something with 20% down for a new time home buyer. My first home I purchased with 5% down, and just purchased a second home with 10%, hopefully for the third one I'll be able to put down 20% - but with the prices here you'll be saving up forever to get to that down payment.
(Genuine question, not from the US)
Isn't that what income tax is supposed to pay for?
I'm continually amazing to hear how much tax Americans pay for how little they get.
And higher education.
1. Federal Government
2. State Government
3. Local Government (usually County level)
4. City Government (sometimes)
Property Taxes fund #4 and #3 typically. Sales tax (kinda like VAT) fund #4 and #2. Income tax fund #1 and #2. Obviously, it changes from location to location. Some states don't have property tax or sales tax.
Schools and Police are typically a function of #3.
Without that system, it would be too difficult to maintain racially-segregated tiered government schools, and white people who had the ability would leave government schools altogether.
I hear you about the risk of being underwater and your proposed solution is to build up a pile of cash that you're prepared to lose if your home price drops below purchase price. But what prevents you from building up that same pile of cash after buying the house if you need to get out of the mortgage? You're going to lose it either way if you want to move and you're underwater.
Incidentally if you are interested in a zero down mortgage, Navy Federal is a great option, alternatively you can look at places like the NASA credit union which is easier to become a member of (no military affiliation required, IIRC you just join the NASA society or something like that).
So if you buy a house with 10% down if may take you many years to get to 20% equity while paying PMI all the while. And exposing yourself to more foreclosure risk. If you don't have 150k (plus another 50k for buffer) liquid then you probably can't afford the 750k home and look for something cheaper or continue to rent and invest the difference between rent and mortgage to possibly stay ahead of the property values of your area.
However, YMMV.
I don't believe the typical person should take on that type of incredible risk.
> I don't believe the typical person should take on that type of incredible risk.
If you can't afford it, you shouldn't do it. I'm talking purely about maximizing value by minimizing amount paid overall. Sometimes you will be better off waiting to get 20%, sometimes you are better off taking advantage of current market conditions. In both cases, there is the the chance that your decision ends up costing more than the other strategy, depending on how the market performs.
My bet is on technology continuing to drive our economy to new levels of productivity and prosperity, along with it bringing real wealth creation, wage growth and price appreciation for real assets.
Will there be corrections? Probably. Are we going to be Japan? Probably not, but if we are so be it.
Just like massive advancements in technology drove up asset prices in 30s America, or 90s Japan, or 1880s America for that matter ...
No, the price would not pull away from you. With 20% down payment required to complete a purchase, real-estate prices would actually come down to an affordable level, like they used to be. The requirement would eliminate all the clowns with 0% or 3% down payments who buy houses they can't afford, jacking up prices for everybody else.
But you will be assuming that Seattle maintains a 7.5% growth rate over your specified time period. (It would be nice for me, I'm in contract on a house in Wallingford.)
However there is a bit of a problem with market forces in this regard. No (or little) money down mortgages have become almost the norm. The average homeowner puts significantly less than 20% down. This inflates home prices for several reasons:
1) People can buy more expensive homes on less money, allowing land owners to increase prices
2) Mortgage rates/plans are now structured to cover for the higher risk quotient (even if you do the usual 20% down you're still paying for the idiot who bought a million dollar home with nothing down)
3) Potential first time owners are forced to buy less for their money, further inflating that specific market which has huge ripple effects into the more mature sectors (first time home owners are far more likely to sell their current home and now there is additional financial pressure to make a profit, etc. etc.)
4) People, wisely or unwisely, exploit these new conditions to "play" the real estate game
5) The market becomes less sane the larger/more expensive the home, as the higher prices (even normally) encourage people to put less down
And guess what... all of this just makes it harder to put 20% down on a home, further exacerbating the cycle. Especially when you're in a bidding war and someone is willing to outbid you because they're putting less money down (which is a terrible financial move, but one that happens all too frequently). Bidding wars are low key one of the biggest reasons people go into housing debt, they get caught up in a specific house and aren't willing to walk away regardless of how the finances have changed since they first looked.
There's a lot of economic intertwining here with QE, general interest rates, and the economy at large so I'm not going to profess to know what's really going on here, but the housing market is very close to "utterly f*@#ed" for the middle class with no foreseeable recovery. And that's not even getting into the pandora's box of how the new exploding rental market is also skewing the market heavily.
Quick thought experiment: How many people that are buying at 100k do you think have 20k in the bank? Now how many of those do you think have 20k to drop on a down payment? Now look at what 100k gets you in a modern metro area and cry yourself to sleep.
Having gone through a 'bidding war' twice purchasing my last two homes, I can say this not really the case as in the market dynamics you describe the appraisers can't keep up with market value and usually therefor those contingencies are waived as a prerequisite by sellers. This means the buyer needs to come up with cash for whatever difference between sale and banks appraisal price. This in turn results in deals falling through because people didn't have enough liquidity so now the seller requires proof of liquidity and actually prefer offers with bigger % down payment, even if the actual offer is lower. For the same reason all cash offers often get accepted over higher mortgage backed offers, just because there's less risk for the seller of the deal falling through. But yeah, to your last point, buying a house in any hot market sucks and comes with lots of challenges, the first of which is overcoming the absurd prices.
I would like to see an similar interactive app for determining if I should lease or buy a car. :)
- Cars vary widely in how they hold value (for example: http://www.autotrader.com/research/article/car-news/209232/2...)
- Cars will always depreciate, houses will often _appreciate_
- Leasing is almost always the poorer choice, barring basically the one case where you know you will need a car for the lease term only (and will not be getting another car afterward)
Outside, LA, SF, DC, NYC, maybe Chicago or Philly where are all these stand alone houses for rent?
serious question
outside of major markets I don't percieve the rental stock of nice, stand alone homes with yards, being paticularly large or liquid
isn't the rent vs own always a bet on the relative size of the rental stock vs available for sale stock?
if I wanted to rent a $250,000 4 bedroom home in somewhere like Westerville, OH, how many options am I really looking at?
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http://www.homes.com/rentals/westerville-oh/?beds=4
looks like there are 4 houses that meet the critera having 4 bedrooms (and Westerville is actually much larger than most suburbs)
951 Brockwell Drive, Westerville OH, 43081 will cost you 2,000 to rent
zillow say the house is worth 231K
if I'm putting down 30K, and taking a 200K mortgage at 4% interest, http://www.mortgagecalculator.org/ says I'll pay $1,194.41 a month
where are all my savings from renting again?
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I'll buy the argument that it makes sense in major cities, especially in markets where flippers drive up the costs
and also for people who would be buying attached properties
I'm not really that impressed with the argument for suburban stand alone properties in flyover country
I'm not sure who you're railing against. Plugging in your numbers to the linked post says you should only rent the Brockwell Dr. house if you can get it for less than $850/mo.
its strikes me that a big issue with renting is the liquidity of the market you're renting in
especially if you have kids, and changing school districts becomes a big deal
all in all, I'd rather not make a 30 year bet on the US residential real estate market with a whole mortgage worth of my net worth
but its seems currently I have to pay a pretty steep premium to make the opposite bet
Buying a house is certainly something of a financial bet and clearly makes you less mobile. On the other hand (barring foreclosure), nobody can force you to move and you have a lot more flexibility in what you do with the property. For most people, as time goes on, the ability to pick up and move to another city without too much thought becomes less important and having more stability in their residence more so.
Also, mortgage is REALLY not the only cost of home ownership. I own a house worth about $200,000. My mortgage payment is about 850/month, my taxes are about 550/month, insurance is 60, and I budget 300/month for maintenance. It would cost me 1600 to rent an equivalent house, so I'm paying more on a monthly basis to own than I would to rent. Some of that is equity, true, which is why we bought. On the other hand, when/if we sell, we'll be paying a realtor $12,000 for the privilege, so we'll have to live here awhile before the equity gains outweigh the transaction costs.
You might not be paying much more than rent.
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how old is your house?
how much of your maintenance budget have you actually used?
When a housing situation goes south and your only recourse is to uproot and move, you're not exactly in an advantageous situation. I had the misfortune of renting from someone who more or less turned out to be a slumlord and whom I had to take to court to get my deposit back from after deciding to leave. The tenant laws were luckily very clear. A landlord needed to prove the condition of the property is what they said it was before and after, which in my case they couldn't since the damages they claimed were fabricated. But to my surprise, the judge, when considering the he-said-she-said nature of the dispute, ruled in favor of the landlord "by default", as she said, even though the law is very clear on where the burden of proof lies. I could have appealed, but by that point I had moved out of state so it wasn't worth the hassle.
When I eventually did buy a home, the lender required a letter from all of my previous landlords stating that I was a tenant in good standing, even from the slumlord, who I can assure you was not interested in doing me any favors. No amount of discussion with the lender could move them on this point, and it looked as if I was not going to be able to get the house. The situation was saved when, at the 11th hour, I quietly received the needed letter from the slumlord's wife, who was apparently more sympathetic.
The idea that the absence of personal letter from an indifferent slumlord could prevent me from buying property was insane, and the entire ordeal, including the court judgement, highlights the extent to which property owners are held in higher regard than renters, as the judge said, "by default". You'll find this to be true in so many situations...
Edit: that isn't to say you didn't do your due diligence, just adding my two cents. You might have done a great job researching and still been F-d. It does happen.
As a renter in SF, I feel more like a tourist than a resident -- I don't care very much about the schools my kids will probably never go to or a lot of the far off political issues that will probably never affect me. I'm a young programmer and don't really have roots here. I think it would feel really different if I owned my home.
Home owners, did buying change your sense of community?
Disclaimer: My company Open Listings (YC W15) is trying to make it simple and more affordable to buy a home [1].
[0]: http://ecedweb.unomaha.edu/neba/journal/EBJIP2009NiDecker.pd... [1]: https://www.openlistings.co/
We're actually going through a mini-crisis where I live as young kids who grew up here are now turning into teenagers and starting to do teenager-y things. A few minor crimes have occurred recently and as a result of citizen interest, the police have been out in force and even made some arrests.
Keep in mind, this level of crime, which is a big deal in a decade here, was weekly where I rented, and I didn't rent in a bad area.
Good thing those are easy to predict!
One thing renters often don't understand when making claims about the personal expenses buyers have to go through to maintain their property is that renters are paying for those things, it's simply amortized over the period the property is up for rent. The money has to come from somewhere, and it comes from the renters.
When a renter moves, there is $0 from their rent that they are able to capture and move forward to their next property. While an owner can sell their previous property and carry forward their equity. To make an analogy, it would be like a renter being able to turn a $1000/mo rent into a $500/mo rent simply by having paid all the rent on-time at their previous place. This doesn't happen with renting, but it happens with buying, where a buyer can carry equity from a previous home into the purchase of a new one and turn a $500,000 loan into a $250,000 loan (assuming the equity they're carrying forward is worth 50% of the loan amount).
The length of time you will live at a place is also unimportant. You always need to live somewhere. Suppose I need to start housing myself at 20 and die at 90. I need to sort out shelter for 70 years. By buying a place you pay for it for 30, then get it for "free" (minus taxes and maintenance) for 40 years. With renting, you pay for shelter for all 70 years.
You can also rent out your property and make somebody else pay for it. Or rent out part of it for the same. In most rental markets, you can individually rent bedrooms for a total that exceeds the single unit rental price for the entire property.
What about markets where the rental fee is lower than the mortgage + taxes + maintenance? The property owner probably bought the property when property prices where lower, or owns it outright or is expecting to capture the delta when selling the property.
But rent here is so much lower than owning? For how long? If you purchase a home now, your 30 year mortgage will cost you the same per month for 30 years (or less if you pay off principal early). Thus a $2000/mo mortgage today will cost $2000/mo in 30 years. While rent only goes up -- usually with inflation. It's likely you'll be making more money in 30 years, so while renters will continue to pay the same share of income on rent, owners will not, their share of income for shelter decreases over time.
The local property market has to be extremely strange for decades for buying to ever be a worse idea than renting over the long-run. There are some advantages to renting, but they're very rarely, if ever, financial over the long-term.
Then there is the psychological cost of ownership, which to me is a mental burden knowing I have debt.
The way I see it, there's no such thing as ownership. You're always paying someone. Suppose you own your house free and clear - can you paint your house pink? Can you have a collection of junk cars on your front lawn? (The neighbors will complain.) Can you build a patio? (Not without a permit.) Can you blast music really loud?
I recently bought a mortgage note (which makes me the lender) and let me tell you, as much as the homeowner thinks she owns the property, in my mind I have all the control.
Just my two cents, from the perspective of being a lender and a landlord. And yes, I rent.
To me, the only time it old make sense to buy a house is if I would buy it as an investment. Or if I have a family and the price is right. Personally, I value flexibility and less stress.
You are comparing two different kinds of things, financial sense and the intangible sense.
Over a lifetime, renting almost never makes financial sense.
Renting can have some benefits, but they tend to be intangible ones.
Some intangible benefits do translate to financial benefits, though. Like as a homeowner you are more likely to pay for costly renovations. And this is a guess, but people tend to buy a more expensive place than they would rent. And renting closer to places you want to be might save money in travel, commute, etc.
Renter pay for those costs also. The money has to come from someplace. It's simply amortized over a longer period. For a property owner they have to swallow it at once.
It's a really common misunderstanding on the part of renters that they believe their rent only covers the right of existing in a property. It covers all the costs of the property owner (and likely makes them a little money extra).
However, let's suppose you're in month-6 of a 1-year lease and the owner decides to renovate the roof or something. You're protected from paying for that until your lease is up. But this is one reason why rent goes up over time. You, or the next tenant will eventually end up paying for these things.
How much did you pay for it/what's the yield? (curious to see how the math works out)
Also, 12%? Did you buy that with 100% cash/equity, or a combination of equity and debt?
If you're curious check out pprnoteco.com
I now pay only $130 more per month than I did living in an apartment, but it's the freedom that I think is the real benefit of buying a home. That and triple the space...