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Why did the person in your example not buy when rent became more expensive than owning? And why have the property taxes not gone up for your homeowner?
Because rent is not more expensive than owning once you include the opportunity cost of the owner's equity.
Where do you live where you can rent a place for cheaper than a mortgage on a similar place? Why would that person rent to you at that price? Wouldn't they be losing money? Plus they have to deal with upkeep and maintenance. Sounds like you have the perfect land lord. Someone willing to take a hit on their property to make sure you have a place to rent.
If there was no credit, people would be required to purchase goods and services with the cash they have on hand. Prices would be a LOT lower on everything if people were reqired to pay for things out of pocket.
Credit is a killer because it inflates everything, houses would be 1/5th to 1/10th of the price they are if people had to pay out of pocket with money they currently had.
So yeah, credit is crushing everyone.
If the price of housing were below construction cost, construction would stop until the prices went back up.
Where do you live where you can rent a place for cheaper than a mortgage on a similar place?
Chicago. My rent is $2100/mo with most bills included. The last time there was anything for sale in my building the asking price was $400K+. At $350K and 4.5% you are looking at PITI ~ $2257 + HOA fees (and those are probably around $500/mo. My new rental rate, should I choose to stay, is going to be $3.2K. My landlord bought the place years ago and doesn't have the PITI of $2257 though, so he can rent below market without losing too much money. Plus, he can write off depreciation to help lower his net cost.
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Originally Posted by mizzourah2006
Why would that person rent to you at that price?
So they can have money coming in. Would you rather lose $1000/mo or $3K/mo?
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Originally Posted by mizzourah2006
Wouldn't they be losing money?
They might.
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Originally Posted by mizzourah2006
Plus they have to deal with upkeep and maintenance.
For the most part they will have to deal with that anyway.
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Originally Posted by mizzourah2006
Sounds like you have the perfect land lord. Someone willing to take a hit on their property to make sure you have a place to rent.
The market will only bear what the market will bear.
We have a consumer economy and a service economy. Reducing consumption and reducing population growth, both of which seem to be what environmentalists want, will hurt our economy and our future fiscal health.
Look at all the social internet driven businesses. Many are for high end tastes and demands that only affluent people have. If these affluent people no longer shop much, travel, eat out, our unemployment rate will skyrocket. We are dependent on the rich, the affluent, the administrative, the techies, the yuppies, to demand services and goods.
Back to the topic of pitchforks. If pitchforks destroy all this, they are not going to build anything. They will just push businesses away, drive money offshore, and burn down factories if we still have some that is. Then the pitchforks will fight among themselves. They have no skills or experience in building industries. They will then have to learn to live in poverty and the ruins of the United states. It doesn't stop there. America will then have to revolve around a China centric world. They will gain more influence over our society and these pitchforks will get to see what authoritarianism means. Good night and good luck.
This and no sense of personal fiscal responsibiity tell all.
One can't spend if one can't save. The majority of America lives above its means and beyond it's needs. How much do Uggs cost? Are they truly necessary? Basic $50 flip phone or $150 smartphone? $60K "look at me" car or $25K A-B car? $200 leather jacket or $50 warm jacket? $5 nail file or $55 manicure?
Priorities are non existent and is why this thead exits.
This and no sense of personal fiscal responsibiity tell all.
One can't spend if one can't save. The majority of America lives above its means and beyond it's needs. How much do Uggs cost? Are they truly necessary? Basic $50 flip phone or $150 smartphone? $60K "look at me" car or $25K A-B car? $200 leather jacket or $50 warm jacket? $5 nail file or $55 manicure?
Priorities are non existent and is why this thead exits.
Uggs are necessary where they are necessary.
Smartphones are free.
The average age of cars is around 11 yrs.
Manicures are worth it if you want your girl to be happy and have french tips.
The problem with such "studies" is that it is (pragmatically speaking) impossible to control for savings propensity personality factors. Even if you weed out all demographic and income factors, it is still inconclusive. The possibility that owners are more disciplined savers to begin with has not been ruled out. Renters may be behind only due to the same lack of discipline or financial prioritization that prevented them from having down payment funds in the first place.
Oh, I know... all the article is pointing out is that, while in some cases, in theory, it can make sense to rent... human nature being what it is, it doesn't work out that way in the real world. When you look at people with similar incomes and similar housing (but rent vs buy) the buyers seem to come out ahead.
The only way to really prove what works out better would be to follow several people with the exact same income and expenses, who have the same amount of money, who live in rental houses whose rent starts out exactly the same as a mortgage in a similar house, who make the same investments, all in different housing markets... and follow these people from adulthood to retirement (or some common age). And that's just not going to happen. Who wants to be a living experiment?
Like you said, those home owners might just be better savers... and maybe they would do even better if they rented. But we will never know because they aren't renting.
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For the umpteenth time, rent vs. mortgage is an apples to oranges comparison until you account for other expenses and opportunity costs of time and capital.
What other expenses? I have the same expenses now that I did when I rented. Insurance? I pay homeowners insurance instead of renters insurance... I pay property tax (but that's rolled into my mortgage payment which is the same now as my rent (on a much smaller place) was four years ago)... I suppose I have maintenance costs, but unlike my rental, when I paid to replace my dishwasher recently, I bought a high efficiency one... that saves me money on electric and water. The rental always replaced with the cheapest. So sure, I might shell out $500 for a dishwasher, but in the course of a few years, I save that much (and more) on utilities.
As for opportunity costs... I assume you are talking about investing a money vs. using it as a down payment. You do realize that real estate is an investment too. That money I put in my downpayment, as the property value goes up, my return on that money goes up as well. Whether it's better than, say stocks or mutual funds, all depends... where did you buy the real estate, what stocks are you comparing it to, etc? Sure real estate can drop in value, but so can stocks. It all depends on what (or where) you bought.
Stocks have a much higher rate of return, that's true. About double that of real estate... but real estate still gives you a return on investment. And off setting it all, when it comes time to cash in... you can sell your house tax free for up to $500k in profits. You have to pay capital gains on those stocks.
It also gives me diversity. Right now, 75% of my investments are in mutual funds and 25% is in real estate (my house). It's not an all or nothing deal where I can't have both.
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No, you pay rent, not property taxes and maintenance plus rent.
If you make the argument that the owner's costs are built into rent, then you have to reduce the rent by the corresponding amount to avoid double-counting the costs the tenant pays. Either you say the tenant pays rent and not taxes/maint, or you say the tenant pays "net rent" and also pays taxes/maint.
You cannot double-count the costs unless you want your analysis to be laughed at and ignored.
What I am saying is that your rent covers the cost of property tax and maintenance that the landlord has to pay. The landlord has these costs and isn't going to lose money on his investment. You might not pay them separately, but I can guarantee they are rolled into your rent. So yes, you are paying for the tax, maintenance, covering the landlords mortgage (if any) and paying a little more so the landlord can make a profit. A landlord isn't going to rent a property to you less than how much it costs.
Where do you live where you can rent a place for cheaper than a mortgage on a similar place?
Greater DC area. The rent/mortgage ratio is very low downtown, although I don't live there.
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Originally Posted by mizzourah2006
Why would that person rent to you at that price? Wouldn't they be losing money?
Depends on what you mean by "losing money". Accounting profit is not the same thing as economic profit.
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Originally Posted by mizzourah2006
Plus they have to deal with upkeep and maintenance. Sounds like you have the perfect land lord. Someone willing to take a hit on their property to make sure you have a place to rent.
Again, you need to distinguish between accounting profit and economic profit.
Economic profit accounts for the opportunity cost of equity and the owner's time spent on the property, while accounting profit does not.
A landlord may make an accounting profit without making an economic profit.
Also, even the accounting profit is not the same as the cash flow. This is because cash flow treats principal portion of payments as an "expense" while accounting profit does not.
In addition, many landlords are "accidental" landlords who couldn't sell. Even if their "profit" in the THREE distinct senses of (1) CF, (2) accounting, and (3) economic profit is negative, they might be trapped with no other choice.
Or maybe they underestimated the costs.
"Buy a home now!" proponents almost always oversimplify the issue and make it seem like "duh, it's cheaper to own otherwise no one would be a landlord". But this is just that - an oversimplification which ignores the nuances of both finance and human decision-making which is not always rational.
Oh, I know... all the article is pointing out is that, while in some cases, in theory, it can make sense to rent... human nature being what it is, it doesn't work out that way in the real world. When you look at people with similar incomes and similar housing (but rent vs buy) the buyers seem to come out ahead.
The only way to really prove what works out better would be to follow several people with the exact same income and expenses, who have the same amount of money, who live in rental houses whose rent starts out exactly the same as a mortgage in a similar house, who make the same investments, all in different housing markets... and follow these people from adulthood to retirement (or some common age). And that's just not going to happen. Who wants to be a living experiment?
Like you said, those home owners might just be better savers... and maybe they would do even better if they rented. But we will never know because they aren't renting.
What other expenses? I have the same expenses now that I did when I rented. Insurance? I pay homeowners insurance instead of renters insurance
Which is more expensive. If renter's is $180/year and owner's is $540/year that is triple the cost.
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Originally Posted by jillabean
... I pay property tax (but that's rolled into my mortgage payment which is the same now as my rent (on a much smaller place) was four years ago)...
Okay, you didn't specify that you had the taxes escrowed. I thought the mortgage you were referring to was just PI. Now I get you.
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Originally Posted by jillabean
I suppose I have maintenance costs, but unlike my rental, when I paid to replace my dishwasher recently, I bought a high efficiency one... that saves me money on electric and water. The rental always replaced with the cheapest. So sure, I might shell out $500 for a dishwasher, but in the course of a few years, I save that much (and more) on utilities.
I guess I'll now bug my landlord about inefficient appliances - haha just kidding.
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Originally Posted by jillabean
As for opportunity costs... I assume you are talking about investing a money vs. using it as a down payment. You do realize that real estate is an investment too. That money I put in my downpayment, as the property value goes up, my return on that money goes up as well. Whether it's better than, say stocks or mutual funds, all depends... where did you buy the real estate, what stocks are you comparing it to, etc? Sure real estate can drop in value, but so can stocks. It all depends on what (or where) you bought.
And this is precisely the point I've been trying to make. Buying is NOT *always* better even for the long haul.
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Originally Posted by jillabean
Stocks have a much higher rate of return, that's true. About double that of real estate... but real estate still gives you a return on investment. And off setting it all, when it comes time to cash in... you can sell your house tax free for up to $500k in profits. You have to pay capital gains on those stocks.
It also gives me diversity. Right now, 75% of my investments are in mutual funds and 25% is in real estate (my house). It's not an all or nothing deal where I can't have both.
Fair enough. But the investment in RE is not the equity, but the entire property value. If you go underwater you are still liable for the difference.
Using other people's money doesn't change how much is invested because you still have to pay them back in full.
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Originally Posted by jillabean
What I am saying is that your rent covers the cost of property tax and maintenance that the landlord has to pay. The landlord has these costs and isn't going to lose money on his investment. You might not pay them separately, but I can guarantee they are rolled into your rent. So yes, you are paying for the tax, maintenance, covering the landlords mortgage (if any) and paying a little more so the landlord can make a profit. A landlord isn't going to rent a property to you less than how much it costs.
Which sense of "cost"? Equivalent annual cost or cash flow? And how do you know that?
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