Buying versus Renting in DC (in General)

[14thandYou]

Originally Posted by BajanYankee

In the short run, no. In the long run, who knows? In the District, purchasing a home is an ideal investment. It's better than putting it in T-bills right now. Don't believe me? The WSJ says that the Feds are paying negative interest on treasuries, meaning that people have so little faith in the economy that they are literally paying the government to hold on to their money.

Depends on where in the District. In consistently high-performing neighborhoods, sure. But there are a lot of buyers who purchased speculative homes in "transitional" neighborhoods between 2004-07 who will not see a return on their investment for some time. That type of thinking, as far as I'm concerned, is what has truly poisoned the real estate market, in DC and elsewhere: the idea that, no matter where you buy and how much you'll pay, you'll end up making a truckload of cash. It's true that most homes, if one remains in them for 15 to 20 years, will return a decent amount (thought not always matching the pace of inflation, interestingly). In neighborhoods like Dupont and Logan this is particularly true (and it doesn't take anywhere near that long). But we personally know individuals who purchased in places like Petworth and Ft. Totten 4 or 5 years ago who will be chained to their homes for the next decade because they bought at the height of the market and would break even, at best, if they attempted to sell today (one of them has a three year old girl and has some very challenging decisions to make regarding school). This becomes even more true when you leave the District's borders and venture out into suburbia.

That's a very dull silver lining. Say Guy A buys a house for $100,000 (this is also the market value of the home). He makes a 20% down payment, or $20,000. His equity (the difference between what the house is worth and what he owes) is $20,000. Then let's say a crazy group of politicians called the Rethuglicans decide that slashing government spending and prioritizing a balanced budget is the way to get the economy back on track. Within three months, his property has lost $30,000 in value. He loses his job and has no savings to live on. His credit is ruined.

Guy B also buys a house for $100,000. He does 100% financing. After the Rethuglicans finish destroying the economy, the value of his home also drops by $30,000. He loses his job too, but since he never put money down on the home, he has $20,000 extra in savings to tide him over.

Who would you rather be?

Neither. If it will completely decimate one's savings, one shouldn't be putting $20,000 down on a house (or buying that house in the first place). That's a poor decision in and of itself. I would favor a situation where Guy C puts down $10,000 (leaving himself a $10,000 reserve in savings)--this would give him less negative equity (and thus put him in a more favorable position with the bank and a greater vested economic interest in the home) and give him the benefit of lower monthly payments and lower amounts paid in interest to the bank, while allowing him to return to positive equity faster when the housing market bounces back. Given the above situation, neither one of them are in a good financial position if their houses have lost 30% of their value (assuming both have lost their jobs). Guy B's in a better short term position because he has more cash on hand, but is in a worse long term position because he has far more negative equity in his home, placing him at greater risk for foreclosure and in a nearly impossible position should he need to sell.

I do agree that some people had prime loans that they could not afford. But there were not nearly as many unaffordable prime loans originated as there were unaffordable subprime loans. The whole crisis began with defaults on subprime mortgages and those defaults shook the financial system to its core. Once the liquidity dried up, and people started losing jobs, then the defaults on the prime mortgages started to mount, too. In other words, in the absence of extensive subprime lending, I'm not sure we'd be in the mess we're in today. I don't think there were enough inherently bad prime loans to push us to the brink of disaster.

That's the narrative that's been put out there by the mortgage industry, but I don't know how accurate it is. For instance, there actually isn't a strong correlation between the type of loan (prime, subprime) and whether or not that loan is likely to end up in foreclosure. During the height of the housing crisis 51% of foreclosures were related to prime loans. (http://online.wsj.com/article/SB124657539489189043.html)

The mortgage industry has been touting for years how little-or-no down payment qualified loans have put millions of Americans into homes they otherwise could not afford. But there is a stunningly high correlation between homes with negative LTV ratios and foreclosures. And there's a stunningly high correlation between downpayments of less than 5% and mortgage delinquencies. The type of loan secured doesn't trend nearly as closely to delinquency or foreclosure as does a low downpayment and LTV ratio.

Never. Never in our lifetime will we see the elimination of the mortgage interest deduction. The builders' lobby, the realtors' lobby, mayors, states and everyone else would murder Congress. I mean, that's the biggest incentive for people to buy homes, and when people buy homes, construction workers make money, lenders make money, realtors make money, and cities collect taxes on the property. Those taxes, in turn, go towards paying teachers and police officers. They'll never get rid of that. You'll see the U.S. reverse its policy on a Castro-controlled Cuba before you'll see that.

Well, considering that the U.S. *is* reversing its policy on Castro-controlled Cuba...

I think a change to or elimination of the MID is closer than you think. Speculation around the recent debt ceiling negotiations had the elimination of the MID as one of the last "revenue enhancers" that was taken off of the table. Ultimately, some deal is going to pass through Congress that includes some combination of increased tax revenue, whether through the elimination of Bush-era tax cuts, a tightening of corporate tax loopholes, or the elimination of certain tax deductions--and you can bet that the MID will be up there. It might not happen soon, but it also isn't chiseled into stone.

[BajanYankee]

Originally Posted by 14thandYou

Depends on where in the District. In consistently high-performing neighborhoods, sure. But there are a lot of buyers who purchased speculative homes in "transitional" neighborhoods between 2004-07 who will not see a return on their investment for some time. That type of thinking, as far as I'm concerned, is what has truly poisoned the real estate market, in DC and elsewhere: the idea that, no matter where you buy and how much you'll pay, you'll end up making a truckload of cash. It's true that most homes, if one remains in them for 15 to 20 years, will return a decent amount (thought not always matching the pace of inflation, interestingly). In neighborhoods like Dupont and Logan this is particularly true (and it doesn't take anywhere near that long). But we personally know individuals who purchased in places like Petworth and Ft. Totten 4 or 5 years ago who will be chained to their homes for the next decade because they bought at the height of the market and would break even, at best, if they attempted to sell today (one of them has a three year old girl and has some very challenging decisions to make regarding school). This becomes even more true when you leave the District's borders and venture out into suburbia.

I'm talking about people who bought in the District. Homebuyers in DC will see greater appreciation vis-a-vis their counterparts in other parts of the country. There are exceptions, but as we all know, the exceptions do not make the rules.

Originally Posted by 14thandYou

Neither. If it will completely decimate one's savings, one shouldn't be putting $20,000 down on a house (or buying that house in the first place). That's a poor decision in and of itself. I would favor a situation where Guy C puts down $10,000 (leaving himself a $10,000 reserve in savings)--this would give him less negative equity (and thus put him in a more favorable position with the bank and a greater vested economic interest in the home) and give him the benefit of lower monthly payments and lower amounts paid in interest to the bank, while allowing him to return to positive equity faster when the housing market bounces back. Given the above situation, neither one of them are in a good financial position if their houses have lost 30% of their value (assuming both have lost their jobs). Guy B's in a better short term position because he has more cash on hand, but is in a worse long term position because he has far more negative equity in his home, placing him at greater risk for foreclosure and in a nearly impossible position should he need to sell.

The scenario was meant to be as simple as possible. Guy B is in a better position because he didn't put any cash into the incinerator we currently know as the U.S. housing market. In that scenario, Guy A and Guy B will both take an "L," although Guy A's "L" won't be quite as large as Guy B's. But if the bank is going to foreclose in either case, does it really matter whether you owe $80,000 or $100,000? Your credit's screwed either way, so I'd rather have more cash and jacked credit than less cash and jacked credit. Cash is king.

Originally Posted by 14thandYou

That's the narrative that's been put out there by the mortgage industry, but I don't know how accurate it is. For instance, there actually isn't a strong correlation between the type of loan (prime, subprime) and whether or not that loan is likely to end up in foreclosure. During the height of the housing crisis 51% of foreclosures were related to prime loans. (http://online.wsj.com/article/SB124657539489189043.html)

Well, prime loans are inherently less risky. It's not clear whether people defaulted on prime loans because they could not afford them from jump street or whether people defaulted on prime loans because they lost their jobs. I suspect it was mostly the latter because the real fallout in the market was caused by interest rate resets on ARMs.

Originally Posted by 14thandYou

The mortgage industry has been touting for years how little-or-no down payment qualified loans have put millions of Americans into homes they otherwise could not afford. But there is a stunningly high correlation between homes with negative LTV ratios and foreclosures. And there's a stunningly high correlation between downpayments of less than 5% and mortgage delinquencies. The type of loan secured doesn't trend nearly as closely to delinquency or foreclosure as does a low downpayment and LTV ratio.

My emphasis has always been on getting a payment you are comfortable with. If you can put down 3% on a house and get a payment you are fine with, then I don't see the need to put down anything more. After all, the money you're not putting down on the house can be put into an interest-bearing account. And unlike an interest-bearing account, the money you put into a home (in this market especially) is gone, gone, gone. You just can't walk up to Wells Fargo and say, "Hey, I put down $50,000. The value of my home dropped by $100,000. Can I get my 50 Grand back?" Nope. It's gone. I think anyone buying needs to seriously consider that possibility.

The days of "I'll put down a down payment to protect against a housing downturn" are over. For now anyway. Say you were one of the people who put down a $150K down payment on a $600K home in Arlington while all of your neighbors put down nothing. Then the value of the house falls by $150,000. It's not much consolation to say, "Well, honey, our whole $150K got wiped out, but at least we can break even on the house!" And honestly, you're not really even breaking even. And that's because you actually had more money before you bought the house.

Originally Posted by 14thandYou

Well, considering that the U.S. *is* reversing its policy on Castro-controlled Cuba...

Did I fall asleep while Congress was lifting the trade embargo against Cuba? Last I checked, it was still very much in effect.

Cuba

Originally Posted by 14thandYou

I think a change to or elimination of the MID is closer than you think. Speculation around the recent debt ceiling negotiations had the elimination of the MID as one of the last "revenue enhancers" that was taken off of the table. Ultimately, some deal is going to pass through Congress that includes some combination of increased tax revenue, whether through the elimination of Bush-era tax cuts, a tightening of corporate tax loopholes, or the elimination of certain tax deductions--and you can bet that the MID will be up there. It might not happen soon, but it also isn't chiseled into stone.

You will never see that happen. The tax revenue you'd gain would pail in comparison to the tax revenue cities would lose because of a smaller tax base. Not to mention the negative multiplier effects of taking money away from banks, developers, realtors, etc. The mortgage interest deduction is very much chiseled in stone. They say all politics is local, don't they? I mean, just imagine if Eleanor Holmes Norton (is she were a rep as opposed to just a delegate) sponsored legislation eliminating the deduction. Do you think Clark Realty really wouldn't fill her opponent's war chest to the brim? And what about the millions of homeowners around the nation? I know I would personally be running smear attacks against her. Do you think Caterpillar would just sit idly by and not let those condos be built? Do you think Teachers' Unions would not be worried about where their funding would come from? As it stands now, property taxes is the only way we can fund schools because people in Virginia (or any other state) do not want their money going towards schools that their kids do not attend. What politician in his or her right mind would want to take on all of those lobbies?

For those reasons, the mortgage interest deduction is here to stay.

[DomRep]

I wish I could like these posts, but I have to spread rep around. Been learning a lot the last two pages of this thread. Great stuff guys!

[14thandYou]

Originally Posted by BajanYankee

But if the bank is going to foreclose in either case, does it really matter whether you owe $80,000 or $100,000? Your credit's screwed either way, so I'd rather have more cash and jacked credit than less cash and jacked credit. Cash is king.

If the bank is going to foreclose in either case, Guy B will be in a moderately better position, although both are financially toxic. (But it's also likely that Guy B is going to invest some, if not all, of his savings in attempting to avoid foreclosure, since foreclosure is so financially devastating. In the long term, holding onto your 420k in savings is likely to be less financially advantageous than avoiding a foreclosure.) The key here is *if* the bank forecloses; Guy A's going to be in a better position to avoid foreclosure or negotiate a revised payment structure than Guy B because he's going to have significantly less negative equity in the home. Guy A also has a greater incentive to avoid foreclosure specifically because he's financially vested into the home. A significant number of foreclosures resulted from homeowners simply walking away from their mortgages--someone who has already paid 20% into the value of the mortgage is going to be less likely to do so that someone who has paid $0.

Well, prime loans are inherently less risky. It's not clear whether people defaulted on prime loans because they could not afford them from jump street or whether people defaulted on prime loans because they lost their jobs. I suspect it was mostly the latter because the real fallout in the market was caused by interest rate resets on ARMs.

I'll proffer my own hypothesis: a whole lot of people were convinced that qualifying for a loan amount meant that they could afford a home for that amount. The proliferation of no- or low-down payment mortgages, ARMs with low introductory interest rates (or interest-only loans), and a greedy and unethical mortgage industry combined to put a whole lot of people into homes they could not afford and which they had little financial investment in. Whether they found themselves caught by a rising interest rate, a loss in income, or simply hadn't calculated the affordability of their monthly payments, the end result was the same. And one of the best predictors of housing distress was the amount of the down payment one put into the home. Someone who was unable to put forth even 5% for a down payment was many times more likely to default on their mortgage than one who could put down 10, 15 or 20%.

It should also be noted that lenders were not encouraging people to put large amounts down. Your original statement was that down payments serve only to line the pockets of banks, but banks and other lenders were actually promoting mortgage schemes whereby people could get into a house for as little down payment as possible. The commission on the loan was of far greater importance than the ability of the buyer to actually afford the property he or she was buying. Thus, lenders actually had a disincentive to encourage sizeable down payments.

My emphasis has always been on getting a payment you are comfortable with. If you can put down 3% on a house and get a payment you are fine with, then I don't see the need to put down anything more. After all, the money you're not putting down on the house can be put into an interest-bearing account.

Well, here's the thing: Not only will putting more down lower your monthly payment, but it will also lower your mortgage insurance. The out-of-pocket difference for a homeowner purchasing a $500,000 home at 10% down versus 3% down can be over $100,000 over the life of the loan. The difference jumps to over $300,000 over the loan term with a 20% down payment. And, as previously mentioned, putting more down is a hedge against a low or negative LTV ratio, and negative equity in the home.

And, again, it bears repeating: few, if any, reputable lenders are providing mortgage loans with less than 5% down to any but the most secured buyers. This is because the banks have also come to the realization that the ability and willingness to put forward a down payment indicates not only the financial means to afford the home, but a willingness on the part of the buyer to cultivate a financial interest in the home.

The days of "I'll put down a down payment to protect against a housing downturn" are over. For now anyway. Say you were one of the people who put down a $150K down payment on a $600K home in Arlington while all of your neighbors put down nothing. Then the value of the house falls by $150,000. It's not much consolation to say, "Well, honey, our whole $150K got wiped out, but at least we can break even on the house!" And honestly, you're not really even breaking even. And that's because you actually had more money before you bought the house.

A down payment was never meant to be a protection against a housing downturn, which is caused by forces outside the control of any individual homeowner. If people thought a down payment would protect them against a depreciating home value, they were poorly educated buyers. A house that loses 20 or 30% of its value is going to negatively impact the owner, regardless of the financial situation the homeowner is in. A downpayment essentially provides three things: a way to hedge against negative equity (the highest correlatign factor to foreclosure), a lower monthly payment, and a vested financial interest in the property, making foreclosure in the event of financial distress less likely.

Did I fall asleep while Congress was lifting the trade embargo against Cuba?

No, but they did reverse course on several longstanding travel bans: U.S. to Lift Some Cuba Travel Curbs - WSJ.com which would indicate, as you mentioned, "the U.S. reversal of its policy on a Castro-controlled Cuba."

For those reasons, the mortgage interest deduction is here to stay.

We're just going to agree to disagree on the potential elimination of the MID. I think the debt ceiling debate was just the tip of the iceberg when it comes to conversations this country is going to have about its finances, and an appropriate balance between spending cuts, revenue, and everything in-between. You might see a scaled version of it (lower deduction amounts for higher-value homes) or some other kind of tiered structure, but I would not be the least bit surprised to see some kind of movement towards a scaling-back or elimination of the deduction, sky-is-falling threats from various interest groups notwithstanding. 20 years ago it was viewed as sacrosanct, but I am not convinced that it is now.

[14thandYou]

Originally Posted by DomRep

I wish I could like these posts, but I have to spread rep around. Been learning a lot the last two pages of this thread. Great stuff guys!

Thanks Dom. This is why Bajan is one of my fave posters on this forum. He's very thoughtful, and a good writer. It's nice to have a thoughtful conversation/argument on this forum every once in awhile.

[BajanYankee]

Originally Posted by 14thandYou

Thanks Dom. This is why Bajan is one of my fave posters on this forum. He's very thoughtful, and a good writer. It's nice to have a thoughtful conversation/argument on this forum every once in awhile.

**BajanYankee blushes**

At the end of the day, I'm all about getting the house and the payment that's right for you. As a best practice, I do agree that you should put money down a house. And I do agree that people who don't put money down on homes are more likely to go into default. For me personally, I didn't see the need to put more money down. My mortgage was only a $100 more than my rent (it's now lower, actually, because my taxes have gone down), so I thought putting down more just wasn't worth it. An extra $10K probably would have saved me like $70 a month.

Looking back overall, I think I'm happy with the decision I made. When I first bought, I'd check dchousingprices.com like a madman and just get depressed. But then I started to look at the situation differently. As much as I bag on DC, I really do like it here, and I'll most likely stay for the long haul (but my kids will not wear North Faces, Nike boots, and dreds). Hopefully, my kids will have a good piece of property that's fully paid for in a desirable area of the nation's capital. As long as you are comfortable with your note, and you keep an eye towards the long run, anyone buying property in this city will be okay.

Btw, one of my former bosses told me he bought his first house off 16th Street in 1990 for $220,000. He said it felt like a fortune back then and that he and his then fiancee (now wife) could barely afford to keep the lights on.

How much do you think that house is worth now?

[DomRep]

Probably a million, or close to it. Growing up here, my mom wanted to buy a house that was/is right across from the apartment building we lived in. It was boarded up for years, I'm talking years. It was a crack house or something, lots of shenanigans went on there. Mind you this was 80s, early 90s before Williams started to clean things up. I think the house was going for 100K, my dad put the kibosh on it, now that house is probably worth at least half a million (estimate of mine, I'm sure I can find it online later). Mom has regretted it ever since. We really didn't know Columbia Heights was going to blow up the way it did (she knew it couldn't get any worse, but we didn't expect it to be the way it is today). They're still renting, and probably have spent more than $300K in that time span. I don't want to be that person.

Edit: $510K according to Zillow.

[BajanYankee]

Originally Posted by DomRep

Probably a million, or close to it. Growing up here, my mom wanted to buy a house that was/is right across from the apartment building we lived in. It was boarded up for years, I'm talking years. It was a crack house or something, lots of shenanigans went on there. Mind you this was 80s, early 90s before Williams started to clean things up. I think the house was going for 100K, my dad put the kibosh on it, now that house is probably worth at least half a million (estimate of mine, I'm sure I can find it online later). Mom has regretted it ever since. We really didn't know Columbia Heights was going to blow up the way it did (she knew it couldn't get any worse, but we didn't expect it to be the way it is today). They're still renting, and probably have spent more than $300K in that time span. I don't want to be that person.

Edit: $510K according to Zillow.

I'll do you one better.

My cousin's best friend bought a house on Capitol Hill right near the metro back in 1999. He tried to convince my cousin to buy a shell on the same street for $46,000. He wasn't interested; he wanted to buy a huge McMansion out in Mitchellville for 8 times that. His friend's house has been appraised at something ridiculous like $1.18 million. He pays nothing on the mortgage because he charges his tenant about $1,800 per month.

My cousin's McMansion went into foreclosure last year. When I asked him why he didn't buy the house right in the heart of Capitol Hill, he said: "Who would have thought people would make such a big deal about living down the street from the Capitol Building?" It was like all of the gentrification and development that would occur over the next decade completely blindsided him.