5 Responses to “Debunking Housing Myths”  

1. 1 Casey on Jul 18th, 2007 said:

   While the article admits to the equity earned while paying for a home, it ignores the additional equity you earn when your property goes up in value due to market increase or property improvements. That amount is significant! The real estate market (in most cities) is one that is nearly guaranteed to rise.

   One of the commenters from the original article said this; “I purchased a condo for 62K, and continued to pay mortgage and taxes consistent with what I would have paid to rent it. Sold that condo 5 years later for 148,500. Even if the market had not gone up, I would have walked away with thousands in equity.”

   That is not to mention that if you plan to own a home sometime in your life, all the rent you pay before buying that home is a waste. Yes, it’s true. If you can afford it, you should start putting your money towards a house that will be paid off sooner, rather than paying money in rent for years and then paying the same amount (higher amount probably, assuming the value goes up -which means less profit from equity in the long run).

2. 2 cash on Jul 18th, 2007 said:

   Hellllllllo Hipsters!

3. 3 Eric on Jul 18th, 2007 said:

   Nice link, I think one thing to keep in mind when purchasing a home is that it’s better to purchase with the intent to own rather than expecting the market to go up. While it’s true that homes do go up in value over time there are many housing developments that are selling new homes for less than used homes driving down the price of used homes. At the same time many of these used homes were new 6-10 years ago, and their 30 hour foundation to finish build times are starting to show.

   I think a common pitfall in buying a new home is to see a bunch of cheaper used homes located a bit further outside of a metropolitan area, and the purchasers buys more home than they need because they can afford the monthly payment. Lenders are also anxious to determine “how much do you want to spend per month” rather than what is the most you want to spend on a house. ARM loans, 80-20 loans, B/C loans, or loans that penalize pre-payment can all be used to try and lower the monthly payment while preventing equity from building up. Instead of buying a home and slowly paying it off you’ve entered into a multi-hundred thousand dollar debt with the hope that your housing market will increase in value by the time you need to move.

   It’s a safer move to buy less home and plan to actually own the home one day rather than just own it for half a dozen years before selling it and moving to another home. I would look at a home as a potential source of continuous income rather than an automated savings plan. Even if you do want to move or need to move earlier than you expected, you can likely pay for the new mortgage while finding a renter for your current home at that point your renter is paying a large portion of your original mortgage and you continue to pay down the principal. Purchasing a smaller home will also increase the chances that you can rent it as a source of income rather than having a large 3000 sq ft where the audience for that home would be more likely to purchase than rent. Getting into a smaller or cheaper home also gives you the ability to apply for a 15 year fixed mortgage with a lower interest rate than a 30 year fixed.

   I like the example that they used in the article:
   “Renting Buying
   Rent/Mortgage: $1,495 $2,093
   Insurance: $20 $163
   Property Tax: - $407
   Tax Savings*: - ($327)
   Maintenance: - $354
   Total: $1,515 $2,690

   *: (less standard deduction)”

   Lets take the two final numbers 1515 and 2690. Now let’s assume that we can spend the full amount for the house each month. This means that we’ve got either 1515 + 1175 in monthly savings or 2690 going into the mortgage.

   The 1515 is tossed away, it’s rent and it pays someone else’s mortgage and in the meantime they fix up the place and keep it in a good state of repair. Meanwhile the 1175 can get invested into something safe and simple like a Index Fund which has little to no fees. I pulled a random index up the AASPX, which has an average return over 5 years at 10.78%. Lets say we live in this house for 7 years which judging from my 10 min google research appears to be the average. After 7 years we will have $151,784.25 in our Index fund. If we go the other route and buy the home we have a 495,000 home but we’re not putting much into the principal due to the fact that 80% of our monthly payment goes to the mortgage, (1674.40, only 416.60 goes to the principal each month the other 597 is eaten up by insurance, property tax etc). Now lets say we live in Denver, I randomly selected this city because well, I live in it. The annual growth rate for a home in Denver is 1.8% according to cyberhomes.com now after we have our 495,000 dollar home in Denver for 7 years we’ve got a whopping 560,840,86 home. Plus we’ve been paying something off the principal too so that helps, we’ve paid 34,994.40 off the principal. So we’ll sell the house, for 560,840.86 because that’s what it’s worth, then take off the remaining 460,005.60 that we still owe on it and we’ve got 100,835.26. This isn’t really as much as 151,784.25 which is what we get from low risk index investing.

   It is true that there are hot markets like the insane louisville real estate market which is boasting crazy high returns of 128% on homes in the past year, or we could look at the depressing San Diego market where real estate used to be a sure thing but is returning -5.7% on homes. When a modest home costs close to a million dollars in orange county a 5.7% loss can really send you to the poor house.

   So now lets figure out what happens if you stick it out for the long haul.

   Scenario A is easy 1175 per month for 30 years at 10,78 interest is a handsome $2,980,480.13.

   With Scenario B your $495,000 dollar house earning 1.8% in Denver is worth $845,353.86 after 30 years. You own all of that now, but if you want any piece of it you’ll need to look at taking a 4-7% hit from a realtor.

   Keep in mind that you’ve paid $928,125.00 in interest alone vs the $545,400 paid in rent.

   I’ll admit there’s some assumptions being made here, we’re assuming that the gain rate will stay the same, it’s likely to fluctuate wildly due to hot and cold markets. Those same fluctuations will cause the renting rate to change as well. Overtime, the renting rate will be much higher than when it started and landlords rarely allow renters to lock down rates for 30 years. Senario A may have more a great deal more money but they’re likely paying higher rental fees. Still, if they can maintain the 1175 per month being a multimillionaire is nothing to frown upon.

4. 4 Greg on Jul 19th, 2007 said:

   Eric,

   I really like these two points you made:

   I think one thing to keep in mind when purchasing a home is that it’s better to purchase with the intent to own rather than expecting the market to go up.

   and

   I would look at a home as a potential source of continuous income rather than an automated savings plan. Even if you do want to move or need to move earlier than you expected, you can likely pay for the new mortgage while finding a renter for your current home at that point your renter is paying a large portion of your original mortgage and you continue to pay down the principal.

5. 5 The Tim on Jul 19th, 2007 said:

   Hi, The Tim here (author of the linked article). I just wanted to address comment #1 above:

   While the article admits to the equity earned while paying for a home, it ignores the additional equity you earn when your property goes up in value due to market increase or property improvements.

   Actually that’s not true. I did indeed factor in home appreciation into my calculations:

   In our hypothetical scenario, a renter who invested in the stock market with the $85,000 down payment plus the monthly difference between the $1,515 rent and the $2,690 home-buying costs would be over $500,000 better off after 30 years than the homebuyer, assuming 4% average appreciation.

   While you’re free to argue that 4% is too low, or too high, appreciation was actually factored in.

   The point of my article wasn’t to convince people to rent, or that home buying is a waste of money. I was just trying to point out all the things that should be considered, instead of just taking “common knowledge” at face value. In many places, even when you factor in everything, the numbers work out in favor of buying. I highly recommend you check out the New York Times graphical calculator linked at the end of the article.

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