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When we do away with the current business cycle, end the Federal Reserve, raise interest rates, pay off our government debt obligations, slash spending, phase the FIT out, and allow economic freedom.
The guy's argument about symmetry is completely wrong. House prices can go up much faster than they can go down. The reason for this is that investors can force a price correction if housing is underpriced (buy, "carry" by either renting out or occupying the place, and then sell at a profit) but the "bear" trade (analogous to short selling) is unavailable.
Stock holders don't have to "capitulate" to cause a correction -- someone who doesn't own the stock can step up and short it if they think it's overpriced.
There are other frictions to prevent supply adapting to reduced demand. For example, once a seller is sufficiently underwater, they can't reduce the price anymore without a short sale. Once you buy a short sale, you're not really buying the same product any more -- they are nearly always sold as-is, and the procedure to complete a purchase is onerous.
Because of this, it should take longer for prices to correct than it does for them to go up.
My own personal backstory includes both parents whose families lost their homes during the Great Depression. One family lived in their car. Both parents veiwed home ownership as a risk and therefore rented their entire lives, usually moving annually chasing affordable rents. At the end, they had shoe boxes of cancelled checks and receipts for a lifetime of rent.
Had they bought something, anything during their lives, within all the real estate cycles, they would have worst case lived rent free.
Fast forward to family friends who have lived in the same apartment for more than 20 years. They recently commented how fortunate they were to be long term renters because they have not put their money at risk.
That they have been paying rent for 20+ years was lost on them.
There is a huge difference between the short and long view.
There is a huge difference between the short and long view.
Yep, don't buy unless you are going to stay put fot 7+ years. You can "throw away" money on rent if you were to stay put for many years AND could have paid a reasonable price for a home. But you can also throw away money on real estate commission and other transaction cost IF you buy and sell to quickly in a flat or deflating market.
By the way, I throw away money on food every day and don't complain about it.
My own personal backstory includes both parents whose families lost their homes during the Great Depression. One family lived in their car. Both parents veiwed home ownership as a risk and therefore rented their entire lives, usually moving annually chasing affordable rents. At the end, they had shoe boxes of cancelled checks and receipts for a lifetime of rent.
Had they bought something, anything during their lives, within all the real estate cycles, they would have worst case lived rent free.
Fast forward to family friends who have lived in the same apartment for more than 20 years. They recently commented how fortunate they were to be long term renters because they have not put their money at risk.
That they have been paying rent for 20+ years was lost on them.
There is a huge difference between the short and long view.
But there is a cost to home-ownership called interest, taxes, insurance and upkeep. If I buy a $240,000 home at 5% interest (mortgaging $200,000), after 5 years, I will have paid $53900 in interest plus let's say 12,000 in taxes (2400/yr) and 20,000 in upkeep/insurance ($4000/yr) for a total of 85,900. The balance of my loan is 183,000, so I have $57,000 in equity (assuming no appreciation).
Now I rent the same home for $1200/mo, I will pay $72000 in rent. But my $40,000 is in the bank and turns into about $50,000 (5% interest).
So it costs $13,900 more to own in actual outgoing money, but I have $7000 more in equity vs. savings. So after 5 years I am ahead by $6900 by renting.
So if you figure appreciation, you should come out ahead. But the problem is buying in an uncertain market. If the home depreciates by 10% AND you figure in the cost of a real estate commission, you come out far ahead by renting.
Most realtors tell you that if you hold on for 5 years, you should be fine, but when you do the numbers it is not so in a declining market. So if you are buying in an uncertain market be sure you are staying there for many more than 5 years. Otherwise you will throw away more money buying and renting is the better financial decision....
Although, with compounding, 5% would get you to more than $50,000 balance, not counting tax costs.
The link you gave shows 4.07% on a savings account. So with a 5 year time frame, I could do a mix of stock market and fixed interest and probably come out with even more money in the bank! But I was trying to be conservative, just to show that the numbers don't favor buying over renting ALL the time.
But there is a cost to home-ownership called interest, taxes, insurance and upkeep. If I buy a $240,000 home at 5% interest (mortgaging $200,000), after 5 years, I will have paid $53900 in interest plus let's say 12,000 in taxes (2400/yr) and 20,000 in upkeep/insurance ($4000/yr) for a total of 85,900. The balance of my loan is 183,000, so I have $57,000 in equity (assuming no appreciation).
Now I rent the same home for $1200/mo, I will pay $72000 in rent. But my $40,000 is in the bank and turns into about $50,000 (5% interest).
So it costs $13,900 more to own in actual outgoing money, but I have $7000 more in equity vs. savings. So after 5 years I am ahead by $6900 by renting.
So if you figure appreciation, you should come out ahead. But the problem is buying in an uncertain market. If the home depreciates by 10% AND you figure in the cost of a real estate commission, you come out far ahead by renting.
Most realtors tell you that if you hold on for 5 years, you should be fine, but when you do the numbers it is not so in a declining market. So if you are buying in an uncertain market be sure you are staying there for many more than 5 years. Otherwise you will throw away more money buying and renting is the better financial decision....
Your scenario is rather slanted because you fail to take into account the Mortgage Interest Tax Deduction. Try doing your math again with the deduction and see if you don't come out on the other side of the argument.
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But I was trying to be conservative, just to show that the numbers don't favor buying over renting ALL the time.
