To rent or to buy- your opinions appreciated

[redturtle]

The ideal scenario for buying a home is this -- having some reasonable level of confidence that you will be living in that neighborhood for at least five years. This means having some semblance of stability in your personal life and career -- that you're on a career path and lifestyle that is stabilizing. In plain English, the ideal time to buy a home is when you're at a point in your life where you're pretty sure about settling down and planning on staying at your current location for at least five years or more.

At this point, regardless of the housing market, you and your family don't appear to be in that situation. As a result, I don't think it's wise to buy a home at this point -- the risks outweigh the potential gains.

You're here on a 3-year visa, without any real confidence as to whether you are planning on staying here in the US longer than that. That is by far the most important issue moreso than the money.

Figure out that first - you mentioned that it may take 6 months or more to figure that out. Once you are able to get a bit more visibility that you're more than likely to stay here longer term, then it may be time to buy a home.

But buying a home before you figure out whether you're going to be here longer-term or not opens you up to more risks than most home buyers.

If your horizon is 2-3 years, there is virtually no chance you will be better off buying. While the chances of a huge decline is pretty small now, the general consensus is that housing prices will most likely remain flat or even decline by 5-10% further. And at best, it may increase 3-5% over the next 2-3 years - at best. If you're only planning on holding onto a home for 2-3 years, in this market you will lose more money buying than renting -- yes you may feel you're "throwing away" $73K over 3 years, but unless housing prices rise 5% per year, you will "throw away" even more than $73K once you factor in the closing costs of *selling* your home, maintenance costs (higher than being a renter), taxes, interest, etc. (even if such costs are tax deductible). And even if they rise 5% per year, you're not really better off - they would have to rise 7% per year or more for you to be substantively better off financially. And the chances of that happening in the next 2-3 years is virtually nil. Again, at best it's likely to rise 5% over the next 2-3 years (or 1-2% per year) -- and more likely to remain flat.

The market right now is actually okay for first time homebuyers - IF and ONLY IF you are planning on living there for at least five years or more. The longer your time horizon, the more the price appreciation will outweigh the costs of owning.

And you said it yourself - if it doesn't make sense to sell after 2-3 years, and you're back in the UK, renting out your home when you're an ocean away is a pain in the as - it's additional costs in hiring a management company (which can make more sense if you're a professional real estate investor - where you're getting a management company to manage a portfolio of real estate properties, and not just your *one* house).

Again, I suggest you figure out FIRST whether there's a good chance you're going to stay here beyond the three years. If so, then yes by all means this may be a good time to buy because you're also going to be settling down here.

It's sort of come full circle, back to the old days again. Buying a home is becoming (again) a life decision, with potential financial benefit, rather than the other way around (which is what it was like during the property bubble - people buying homes as financial decisions with the "life" aspects a byproduct).

[Londonteacher]

Thanks Red Turtle- you make a lot of good points and the calculater was very helpful. We would love to stay here beyond the 3 years and hope that the company will renew the visa as they have with other colleagues- but of course there are no certainties and that is what is hard- if 3 years down the line we get visas to stay another 3 years i really will regret that 73K spent on rent.

ANyway we have 6 months left on our rental contract so can do nothing till then. I think we give it a year and then make a decision. I have just never spent this much on rent- and it just feels such a waste when we may indeed stay here 6 years and beyond. We wil be so sad if we have to go back to london in 2.5 years- we find LA great if expensive and offering a very high quality of life compared to london. However we have yet to investigate the public schools here.....so maybe i will have a change of heart if i cannot find a good school.

[JohnG72]

Originally Posted by Londonteacher

if 3 years down the line we get visas to stay another 3 years i really will regret that 73K spent on rent.

Not if properties you are looking at drop 25% in value...over $100K...which still would mean they would be at 5x average household income for the neighborhoods I suspect you are talking about(ie, still in a bubble situation even after a 25% drop from current value).

I state this to demonstrate exactly how huge of a fall much of Los Angeles real estate still has to take.

[Londonteacher]

Thanks John

Yes- your suggestion is I think absolutely possible since the rise we have seen has been crazy- properties simply cannot be worth what they have been going for until recently- and to be honest I don't actually think they are worth what they are going for now. Of cours something is only ever worth what people are prepared to pay for it but it is more now about ability to pay- and i just do not think the average los angelean can afford the most modest home so no buyers able to finance mortgages equals massive drop still to happen.I am guessing that the average salaryhere in LA is 50-70 K and since homes start from 350K this is 6-7 times the average income- the buyers cannot be out there now lenders have tightened up so a major correction is still to come. But then people are telling me that they think the market has bottomed out and LA is seeing a small increase in prices at the moment.

John- am I right in thinking you would advise just spending tha 73K+ in rent and not buying in the next 3 years here?If our rent was a third less I would not feel it is such a ridiculous waste but to spend the lion's share of our income on rent each month just really grates on my sense misguided sense of fairness.Our oven broke recently- it belongs to the landlord and whilst they agreed to pay they pointed out this is a favour to us and it is in fact our responsibilty- so the one and only appliance they provide is our responsibility even if the previous tenant has worn it down- the repair guy said it was a wear and tear issue and since we have only been here 5 months that is not our wear and tear- this just makes me think i may as well have the hassle of being a homeowner if in LA it seems the tenant bears the brunt of any household expenses like this.