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$300,000 house + 2% annually, after 10 years: $365698.38
I don't know that that is more or less than you had in mind, but it is a significant amount, I think.
Albert Einstein probably didn't say"Compound interest is the most powerful force in the universe," but I like it, anyway.
Now for the equity via amortization, and I assume 20% down, 80% leverage on that $300,000 investment:
Initial balance, 2010:
$240,000
$5.25% 30 year fixed-rate mortgage
Year 2020
Interest paid $10,312.66
Principal payment: $5,590.81
Balance: $193,379.03
$46,630.97 from amortization $65,698.38 from appreciation
$112,329.35 Equity
Yep. Then subtract out the $122K in interest paid, $30K+ taxes, opportunity cost of the down payment, normal maintenance and so on, and you've paid over $1100 a month to live there. In other words, you've paid/given up $256K to get $112K in equity.
That's probably a bit less than renting the place, but renting has always had a premium since you're paying for the convenience of not being stuck under a mortgage.
$300,000 house + 2% annually, after 10 years: $365698.38
I don't know that that is more or less than you had in mind, but it is a significant amount, I think.
Albert Einstein probably didn't say"Compound interest is the most powerful force in the universe," but I like it, anyway.
Now for the equity via amortization, and I assume 20% down, 80% leverage on that $300,000 investment:
Initial balance, 2010:
$240,000
$5.25% 30 year fixed-rate mortgage
Year 2020
Interest paid $10,312.66
Principal payment: $5,590.81
Balance: $193,379.03
$46,630.97 from amortization $65,698.38 from appreciation
$112,329.35 Equity
YES YES YES, there are many other factors.
No one should buy based on this.
Disclaim. Disclaim. Disclaim. This is only an exercise.
None of these types of posts/math can work now because we're in a declining market. We don't know how long we we're going to continue to decline.
So, if we have not reached the bottom, how do we know when we've reached the bottom?
In the past, the worst of the price declines were over when foreclosures peaked. Considering that they're at record levels and still increasing (e.g. Supply of Foreclosed Homes on the Rise Again - WSJ.com), I'd wager that we haven't seen the bottom yet.
Yep. Then subtract out the $122K in interest paid, $30K+ taxes, opportunity cost of the down payment, normal maintenance and so on, and you've paid over $1100 a month to live there. In other words, you've paid/given up $256K to get $112K in equity.
That's probably a bit less than renting the place, but renting has always had a premium since you're paying for the convenience of not being stuck under a mortgage.
None of that is relevant to the post that prompted my exercise.
Besides, the rent for that $300,000 home was not specified, so the numbers cannot follow.
And where I live, a $300,000 house will have less than 1% property tax, which will generally trail behind inflation rates in increase historically.
$30,000 in property tax in ten years is not likely.
Question: What percentage of renters actually capitalizes on investment of their potential down payment nest egg to sieze the income/growth opportunity of their capital?
I suspect it is small. We have too much debt in the USA to think otherwise.
Question: What percentage of renters actually capitalizes on investment of their potential down payment nest egg to sieze the income/growth opportunity of their capital?
I suspect it is small. We have too much debt in the USA to think otherwise.
^^ Bingo...
We can argue the math both ways, but in the end it really becomes a personal difference... I suspect it becomes a wash way more often then not.
With the middle getting squeezed so hard right now, way too many people are living paycheck to paycheck, carrying debt, and "getting by" to think about investing.
I see price has started dropping in my area, central NJ with good school and commute, since April 30 Tax credit expired.
So much money spent for housing stability!!!..
Until wages go up, it's difficult to sustain such high housing prices, even with such a low mortgage rate. As interest rate goes up in next 2 yrs, there will be growing pressure on housing.
The home buying decision has moved beyond a price to income or future foreclosure or affordability argument.
Fact is, if you're going to buy a house, the train is leaving the station. Now is the time to buy. But, as I stated before, you have to be very certain of some very important factors before you do buy, namely:
1. Stability of your job and the local job market/personal income
2. Stability of your neighbors' jobs and financial health
3. Stability of your locality, municipality
4. Fiscal health of your locality, municipality, and state
5. Accounting for future taxes and costs associated with home ownership, such as tax increases (coming), altering of tax codes (removal of mortgage interest deduction, also forthcoming) and implementation of new fees from your local municipality up to the federal government (fees for replacing aging sewer/water infrastructure, fees for services like police/fire/schools/trash).
6. Higher costs of essentials like energy, food, and clothes.
So, if you account for all those measures, and still have found a place where you feel secure about your personal financial health and also that of your neighbors and town, and still feel if other costs rise you are within your affordability, I suggest you buy and buy now. Prices can go lower but interest rates can't, so unless you're paying cash for your home, I fail to see a reason to postpone buying.
On the other hand, for many people, the calculus above will not yield a result which says "buy", so the argument is moot. And for those who are prudent and feel they are making an informed decision, they'll unfortunately find things may not work out so well.
Who will care if you bought and can afford a home which sold for 750k in 2005 for 375k today when the bill for propping up housing comes due for all? Do you have confidence your neighbors, some of whom could afford their 750k mortgage the whole time will continue to do so, as the taxes and other costs choke them off? How will you feel if your home price falls another 10-15%?
Heads I win, tails you lose. That's housing right now.
Please explain this one very contradictory statement to the rest of your post.
What is there to explain?
The present cost of capital and the present availability of capital are at a zenith. Pretty much anyone can get a mortgage, pretty much anyone can get a mortgage with virtually nothing down (3%), and pretty much anyone can get a 5% or even less interest rate.
Moving forward, regardless of a household's ability to qualify for and service a loan, we're likely to see both the cost of a mortgage and the ability to qualify one become more constrained.
So, in my estimation, the real estate market of 2011 will look markedly different than the real estate market today.
So, if you're going to buy a house, and it makes fiscal sense for you, I fail to see any reason to wait.
If you wait, you're likely to find you need to come up with a higher downpayment, pay a higher interest rate, and have less options for loans. The inventory will also be problematic, as many sellers begin to confront reality and pull their properties off the market for a host of factors (can't afford to bring $ to cover loss to closing, can't qualify for short sale, don't want to ruin credit with foreclosure, have enough equity to wait it out, lack of job options elsewhere forcing them to batten down the hatches)
Given some of the headwinds we face in the coming years, it would seem stupid to wait a year to *maybe* buy a house for 10-15% less when your interest rate will most certainly be higher, and you may need to use more of your savings up front.
Catch my drift? If you read my previous posts, my belief is the entire market is going to freeze. It's not going to crash again, unless we have some sort of deflationary calamity (not entirely impossible, but seems unlikely for now).
Prices are about as low as they're going to go. Factors which will affect the market as a whole are:
1. interest rates
2. availability of capital (which i believe will become more scarce)
3. tax benefits of home ownership (which i believe will go away like they have in the UK)
4. sellers desire to sell but inability to do so (due to inability to pay $ at closing)
5. higher taxes and fees at the state/local level
The present cost of capital and the present availability of capital are at a zenith. Pretty much anyone can get a mortgage, pretty much anyone can get a mortgage with virtually nothing down (3%), and pretty much anyone can get a 5% or even less interest rate.
Moving forward, regardless of a household's ability to qualify for and service a loan, we're likely to see both the cost of a mortgage and the ability to qualify one become more constrained.
So, in my estimation, the real estate market of 2011 will look markedly different than the real estate market today.
So, if you're going to buy a house, and it makes fiscal sense for you, I fail to see any reason to wait.
If you wait, you're likely to find you need to come up with a higher downpayment, pay a higher interest rate, and have less options for loans. The inventory will also be problematic, as many sellers begin to confront reality and pull their properties off the market for a host of factors (can't afford to bring $ to cover loss to closing, can't qualify for short sale, don't want to ruin credit with foreclosure, have enough equity to wait it out, lack of job options elsewhere forcing them to batten down the hatches)
Given some of the headwinds we face in the coming years, it would seem stupid to wait a year to *maybe* buy a house for 10-15% less when your interest rate will most certainly be higher, and you may need to use more of your savings up front.
Catch my drift? If you read my previous posts, my belief is the entire market is going to freeze. It's not going to crash again, unless we have some sort of deflationary calamity (not entirely impossible, but seems unlikely for now).
Prices are about as low as they're going to go. Factors which will affect the market as a whole are:
1. interest rates
2. availability of capital (which i believe will become more scarce)
3. tax benefits of home ownership (which i believe will go away like they have in the UK)
4. sellers desire to sell but inability to do so (due to inability to pay $ at closing)
5. higher taxes and fees at the state/local level
Interesting... to me that was quite a bit to explain!
Determining "now is the time to buy" based on an opinion that RE will look very different and uncertainty of what a "freeze" really means for 2011 is out of line to me. I guess I now know why you said the "train has left the station".
As far as deflation - I'd be very interested to know why you feel this seems "unlikely for now".
In modern credit-based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (i.e., to 'control' inflation), thereby possibly popping an asset bubble. In a credit-based economy, a fall in money supply leads to markedly less lending, with a further sharp fall in money supply, and a consequent sharp fall-off in demand for goods. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation. To slow or halt the deflationary spiral, banks will often withhold collecting on non-performing loans (as in Japan, most recently). This is often no more than a stop-gap measure, because they must then restrict credit, since they do not have money to lend, which further reduces demand, and so on.
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