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Old 08-21-2010, 05:56 AM
 
3,736 posts, read 3,115,374 times
Reputation: 2597
Quote:
Originally Posted by Ponderosa View Post
Home ownership pays because homes are appreciating assets - one that provides shelter as well. And don't give me this depression as an example of that not being the case. It is an aberration. If a renter and a buyer pay exactly the same for 30 years, one on PITI, the other on a rental, at the end of the 30 years the renter has a box of receipts and the buyer has a building worth 2-3 time what he initially paid for it - free and clear for the rest of his life. Of course the renter will probably be paying 3x per month what he did 30 years earlier while the owner is paying back his mortgage at the same fixed rate in inflated dollars. The end value is in inflated dollars too but the original principal is, nonetheless, preserved. Renters pay taxes, upkeep and insurance as well - only the method varies. Owners have, as you point out, satisfaction of ownership, stability and something to pass on to their kids if they choose, a source of funds for college expenses via equity taps (and RVs too!). Renters enjoy, again as you said, flexibility, but they pay a heavy price for it. Landlords and investors are not in the rental business for love. They take money out of the renters pocket and put it in theirs. They are OWNERS.

Home ownership is and always will be the greatest way to financial well-being for the average American. There's better ways to make money, but most folks are not savvy enough to swim with the sharks of the finance world.

As you say, let's not include this recent abnormality in the market (the massive run-up and later collapse of the RE market) when studying the merits of renting versus buying.

In typical times, banks donít borrow money at zero percent. Therefore currently, they are not paying much for those who want low risk savings plans. So in these abnormal deflationary times, we also have to ignore the 4-5% interest spread that banks are paying customers in interest versus what the customers are paying back in home interest.

In 1950-2000, if you put your savings into a money market account, you could make a couple percent below the cost banks borrow out money. Additionally, over the long run, you could put money in the market with higher risk and make a higher rate than you are paying on interest. The stock market on average has yielded 10% if you buy the S&P 500. Thatís not exactly swimming with the sharks.

The bottom line is there is an opportunity cost to paying off your loan. And in normal times (1950-2000), you would be better off renting or borrowing money on the home you buy and investing it in a higher rate of return. Therefore your statement about paying off your home over 30 years is really meaningless. You always need to look at the cost of money. I rent out a couple of vacation homes by the week and they are paid for. I still need to cover 5% (which I call the ďcost of moneyĒ) and then add in expenses to figure my pseudo break even costs. Thatís my opportunity cost. The reason to pay off your home is all about your own personal piece of mind as well as what happens in times like these! So when the bank pays out zero percent and charges 5% and the stock market is flat, you may have cash flow problems which is kind of like swimming with the sharks.

My point in writing this is you over made a wrong assumption in your math. Paying something off has an opportunity cost. In 30 years, homes will be more expensive and rent will be more expensive. If you buy in the wrong neighborhood the home wonít keep up with inflation at all. If you buy in the right neighborhood, you can pick-up gains because of the fast land appreciation. But like any asset, the physical shell of the home depreciates. Hence, itís all about buying in the right area (buying low and later selling higher). The real investment is the land that your home is attached to. Just ask anyone who owns a double wide.

 
Old 08-21-2010, 06:19 AM
 
3,736 posts, read 3,115,374 times
Reputation: 2597
Quote:
Originally Posted by Ritchie_az View Post
OK, here are three things that are rarely considered:
1) When the cost per-square-foot of a house drops below the cost to build it (supplies and labor), that is unsustainable, which means at some point that home will have to go up in value. Will that be tomorrow or two years from now? I also have a very hard time seeing the market falling any more. Yeah, there may be some dips here-and-there (just as there will be spikes here-and-there), but, overall, it cannot fall much further than where it's at.
The top of the market had a delay before it began to fall, so there's also a delay before it stops falling (which is what we are seeing now), but the market as a whole is already at the bottom and the lower end of the market has even gone up a little.
Not true. A big part of the cost to build is the dirt it sits on. When small lots in the desert sold for $200K, the cost of dirt is part of the cost to build a home. I saw that argument many time (unsustainable that homes are less than the cost to build). Since then, land has dropped a lot as well as labor, profit margins, and material costs. Nothing says land, labor, material cannot go down some more which reduces the cost to build. In fact I predict that will be the case.

Just about everything else we buy drops in value. If there is a large supply of land (Buckeye) it makes complete sense to me that home prices sell for less than it costs to build. I'd prefer a new home the way I like it versus a 2004 home. Therefore that used home should cost less. If it needs $5K in repairs, it will be priced even lower than the repair costs which is another reason why there is a larger price spread.

Why do people assume that once they buy a house, it has to go up in value?? It too wears out and becomes out of style. Go build a home in a farther out community that will never see expansion (where the land is $10K). That home will depreciate.

If the demand does not keep up with the supply (because people leave the area or there are no jobs to support the price of the home) home prices WILL go down. I'm not saying that they are going to drop 25%, that seems extreme. But 10%... Sure. Why not. By dropping 10% more you would have another wave of SDer's and we could maybe see another 10% drop again. But then again, maybe the job market gets back to 7% unemployment in Phoenix by this time next year and home prices climb back up 15%. It's not looking that way but no one really knows.

Go look at what the price of land has done in the Valley over the past 3-4 years. It has had some wild swings. That is a major force in how much your home can go up.
 
Old 08-21-2010, 07:30 AM
 
3,886 posts, read 6,219,940 times
Reputation: 1422
What about the issue in the Phoenix Metro of a neighborhood that was an asset going bad within 30 years due to sprawl, this too will reverse growth in your homes appreciation. It's hard to keep a home over a long period of time in the valley if you don't choose an historic district to begin with. Most people don't add in maintenance cost over the 30 years either, this brings down your investment. The amount of money you have to put into the home to keep it in good shape over a 30 year period adds up and has to be deducted from the end value.
I don't know, I would be very worried about all of that now, I'm not sure how things will end up here.
I know people make predictions all the time but I'm not sure if I can believe them anymore, especially when we build out instead of up here.
 
Old 08-21-2010, 07:59 AM
 
2,943 posts, read 3,620,067 times
Reputation: 1113
Quote:
The bottom line is there is an opportunity cost to paying off your loan. And in normal times (1950-2000), you would be better off renting or borrowing money on the home you buy and investing it in a higher rate of return. Therefore your statement about paying off your home over 30 years is really meaningless. You always need to look at the cost of money. I rent out a couple of vacation homes by the week and they are paid for. I still need to cover 5% (which I call the “cost of money”) and then add in expenses to figure my pseudo break even costs. That’s my opportunity cost. The reason to pay off your home is all about your own personal piece of mind as well as what happens in times like these! So when the bank pays out zero percent and charges 5% and the stock market is flat, you may have cash flow problems which is kind of like swimming with the sharks.
I'm not Ponderosa, but I don't think that was his point. I believe his point was if you rent (which is not necessarily a bad thing), after 30 years you have nothing to show for it other than you had some shelter. If you purchased, after 30 years you'd have a home you own free-and-clear that may be worth "x" dollars. It's possible to come out ahead hundreds of thousands of dollars owning vs. renting, simply because you have an asset worth that amount vs. renting where there is no asset.
 
Old 08-21-2010, 08:26 AM
 
Location: Sonoran Desert
16,900 posts, read 19,978,250 times
Reputation: 8830
Quote:
Originally Posted by MN-Born-n-Raised View Post
As you say, let's not include this recent abnormality in the market (the massive run-up and later collapse of the RE market) when studying the merits of renting versus buying.

In typical times, banks don’t borrow money at zero percent. Therefore currently, they are not paying much for those who want low risk savings plans. So in these abnormal deflationary times, we also have to ignore the 4-5% interest spread that banks are paying customers in interest versus what the customers are paying back in home interest.

In 1950-2000, if you put your savings into a money market account, you could make a couple percent below the cost banks borrow out money. Additionally, over the long run, you could put money in the market with higher risk and make a higher rate than you are paying on interest. The stock market on average has yielded 10% if you buy the S&P 500. That’s not exactly swimming with the sharks.

The bottom line is there is an opportunity cost to paying off your loan. And in normal times (1950-2000), you would be better off renting or borrowing money on the home you buy and investing it in a higher rate of return. Therefore your statement about paying off your home over 30 years is really meaningless. You always need to look at the cost of money. I rent out a couple of vacation homes by the week and they are paid for. I still need to cover 5% (which I call the “cost of money”) and then add in expenses to figure my pseudo break even costs. That’s my opportunity cost. The reason to pay off your home is all about your own personal piece of mind as well as what happens in times like these! So when the bank pays out zero percent and charges 5% and the stock market is flat, you may have cash flow problems which is kind of like swimming with the sharks.

My point in writing this is you over made a wrong assumption in your math. Paying something off has an opportunity cost. In 30 years, homes will be more expensive and rent will be more expensive. If you buy in the wrong neighborhood the home won’t keep up with inflation at all. If you buy in the right neighborhood, you can pick-up gains because of the fast land appreciation. But like any asset, the physical shell of the home depreciates. Hence, it’s all about buying in the right area (buying low and later selling higher). The real investment is the land that your home is attached to. Just ask anyone who owns a double wide.
Opportunity costs have nothing do with it except in the sense where one buys more home than one needs and could have invested the "excess" in something else. One could live in a smaller, less expensive home. The same could be said for rent, however. You could live in a studio instead of a loft and invest the difference.

Shelter is a necessity and one can make the choice of paying rent or purchasing or living at home with mom for the rest of their lives. It is not discretionary subject to opportunity loss. Historically and I believe going forward, purchasing pays - renting does not. There are certain circumstances where renting your shelter makes sense, but wealth accumulation is not one of them. Not one cent spent on rent is ever recouped. The math is quite simple, actually. It is the renter who is suffering opportunity costs. Were he making mortgage payments instead of rents he could be acquiring an asset instead of receipts in the process of keeping a roof over his head.

BTW, wage growth is a better indicator of home appreciation than overall inflation. Wage growth can be more than inflation as it was for much of the post-WWII period or less as some predict it will be in coming decades. Should things turn out that way, the benefits of ownership over renting will be less than they were during the boomer years. Of course the landlord will realize less as well as his income producing asset will not appreciate as much. The renter - well he gets screwed either way.

Last edited by Ponderosa; 08-21-2010 at 08:50 AM..
 
Old 08-21-2010, 09:06 AM
 
Location: Sonoran Desert
16,900 posts, read 19,978,250 times
Reputation: 8830
Quote:
Originally Posted by twiggy View Post
What about the issue in the Phoenix Metro of a neighborhood that was an asset going bad within 30 years due to sprawl, this too will reverse growth in your homes appreciation. It's hard to keep a home over a long period of time in the valley if you don't choose an historic district to begin with. Most people don't add in maintenance cost over the 30 years either, this brings down your investment. The amount of money you have to put into the home to keep it in good shape over a 30 year period adds up and has to be deducted from the end value.
I don't know, I would be very worried about all of that now, I'm not sure how things will end up here.
I know people make predictions all the time but I'm not sure if I can believe them anymore, especially when we build out instead of up here.
You make a good point with respect to maintenance. Something else to consider is the TI in PITI. Taxes and insurance do not stay fixed. I know many people who pay more in TI than PI.

At the end of the day, you are right. One has to subtract the present value of all payments, maintenance, improvements and probably things I am not thinking about from the present value of the asset (home). I maintain that in virtually every case the result will be better, even if it is a loss, than the present value sum of the rents one would pay over the same period for an equivalent property. The asterisk applies to short term ownership/rents especially in the past 5 years. But I think even those people will realize an advantage if they keep their properties for 20-30 years or more.

And lest this turn into a purely financial deliberation, consider the value of home ownership in the pleasure it provides. I mean this USED TO be the sole reason people bought a house. Pride of ownership, family stability, having a dog or a cat or a pet monkey if you want, painting the kids walls purple and green, ripping out walls and putting in granite to make it look the way you always dreamed your home would. That is why we bought houses in the past. We don't demand that our cars, or our ATVs or really anything make money for us. We buy them for the enjoyment and dispose them for much less than we paid when they no longer please us. Somewhere along the line, we started thinking differently about our homes.
 
Old 08-21-2010, 09:38 AM
 
2,943 posts, read 3,620,067 times
Reputation: 1113
Quote:
And lest this turn into a purely financial deliberation, consider the value of home ownership in the pleasure it provides. I mean this USED TO be the sole reason people bought a house. Pride of ownership, family stability, having a dog or a cat or a pet monkey if you want, painting the kids walls purple and green, ripping out walls and putting in granite to make it look the way you always dreamed your home would. That is why we bought houses in the past. We don't demand that our cars, or our ATVs or really anything make money for us. We buy them for the enjoyment and dispose them for much less than we paid when they no longer please us. Somewhere along the line, we started thinking differently about our homes.
Excellent point. Too many folks looking at houses as investments instead of homes. I'd say this change has happened over the last 35-40 years or so.
 
Old 08-21-2010, 09:54 AM
 
Location: Sonoran Desert
16,900 posts, read 19,978,250 times
Reputation: 8830
Quote:
Originally Posted by Ritchie_az View Post
Excellent point. Too many folks looking at houses as investments instead of homes. I'd say this change has happened over the last 35-40 years or so.
Well, I can see at least some of that. Our society has become more mobile, for one thing. We need to sell that house, often in about a five year horizon, so appreciation is important if for no other reason that to pay the realtors and closing costs. Also, city neighborhoods decay over time it seems. Certainly this is the case in much of Phoenix. There is a myriad of reasons for this, but the end effect is that one must sell or end up living among low-lifes in a rundown dump otherwise. The concept of lifelong ownership is challenged by that too. Then there is good old fashioned consumerism fueled by non-stop blanket advertising that has created a demand for a lot of things we don't really need. Home equity became the means to acquire those things and so home equity is important in satisfying our desires to keep up with the neighbors and have designer t-shirts, overpriced Nikes, an SUV, and all the other new-necessities that have come about in the past couple decades.

So we are not totally crazy in looking at appreciation potential of our homes - just totally crazy for being swayed from our values by Madison Avenue and becoming slaves to our debts.
 
Old 08-21-2010, 10:43 AM
 
295 posts, read 291,383 times
Reputation: 96
I have really seen the slow down in sales and prices myself. With the expiration of the tax benefit, so few people are interested in housing. I'm concerned about my neighborhood and what is going to happen with the foreclosures.
 
Old 08-21-2010, 10:49 AM
 
2,943 posts, read 3,620,067 times
Reputation: 1113
I'm not saying that a house isn't an investment and the financial side should be ignored. But the priority should be (and was for a long time in this country) first a home (to put down roots and raise a family in) and then financial gain. Placing financial "gain" first is part of what caused the current housing mess (sort of putting the cart before the horse--it doesn't usually work too well).
Quote:
just totally crazy for being swayed from our values by Madison Avenue and becoming slaves to our debts.
Absolutely.
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