Great Recession

Anti-Homeownership Study Finds That Now's a Great Time to Buy

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Vampire Landlords of San Francisco live large by squeezing money out of Chinese people.

Here's evidence for the new consensus that homeownership is dumb: A pair of professors of finance say that in the vast majority of cases, Americans would have been better off renting rather than owning between 1978 and 2009. 

"Homeowner expectations for price appreciation did not materialized [sic] on average, and given the expected opportunity cost renting was preferred to owning over 70% of the time between," Eli Berach (East Carolina University) and Ken H. Johnson (Florida International University) write in a paper [pdf] for the University of Florida business college's Financial Management Association International. 

Economics21 explains that the difference isn't between renting and owning but between renting living space and renting (or as Calvin Coolidge might have said, "hiring") money:

Counterintuitive as the finding may be to some, it is actually quite logical. Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another. The choice is between renting the property directly or instead renting the capital necessary to buy the property. The amount of capital to be rented is a function of house prices, while the bulk of a mortgage payment is interest, which is the rental payment on this capital. After 2 years, the typical 30-year amortizing mortgage balance has been reduced by less than 3%. This means that a household that took out a $300,000 mortgage with a 5% interest rate to buy a home has only reduced its mortgage balance by $8,600 after two years despite spending nearly $39,000 in total over this period.

Housing advocates may respond by pointing out that at least the $8,600 in this scenario went towards home equity rather than simply being squandered on rent. But, as demonstrated in the Real Estate Economics article, the principal component of each mortgage payment – i.e. the portion of the mortgage payment that goes towards reducing the principal mortgage balance instead of interest – is an added expense renters don't have. During the housing boom, the wealth created from housing was not principal amortization, but rather large price gains on a highly leveraged asset. 

There's an important nugget buried in that description of the principal payment as an "added expense renters don't have." Berach and Johnson explain that their conclusions assume the hypothetical renter is successfully investing the difference between rent payment and mortgage payment: 

Thus, this piece does not seek to calculate the cost of ownership but rather to create a "horse race" between renting and owning by making a comparison between the value of an investment portfolio held by renters and the net selling proceeds collected by homeowners at the end of a holding period.

If I'm reading this thing correctly, that means the average renter would have to be doing at least a little better than 5.7 percent average annual return on investment. That's a feasible goal, but for a regular person without an interest in Wall Street, it's not as simple as advertised. 

This is not to dispute the findings but to note that real estate's tangibility is for many people one of its appeals. That appeal may be entirely misguided: The hassle of owning land (or worse, a condo) is arguably worse than the hassle of actively investing, where only paper money is at stake and you can get out at any time. But the simplicity of the investment is part of the value proposition for a real estate owner, as this 100-year-old birthday girl can attest: 

Interestingly, Berach and Johnson say the real estate correction (or as I like to call it, the beginning of the real estate correction) has already reversed the conditions described in their own study and made housing an attractive investment again: 

The lowest required appreciation rates for the U.S. are 3.72% and 4.35% when risk free and risk equal expected returns are used and are both associated with the second half of 2009. These observations imply that the current housing condition in the U.S. instigates the lowest price appreciation hurdle for homeowners since at least 1978.

In the course of criticizing government policies designed to encourage marginal households to get into real estate ownership, Economics21 concedes that "they provide an avenue towards wealth creation." Presuming you're not under water, it's true that ownership at least provides an avenue toward wealth assembly, but even that advantage diminishes because government policies don't encourage real estate ownership; they encourage the debt associated with real estate ownership. 

I've been tracking the decline in equity portion (the percentage of their homes people own free and clear) for some time, but not as long as that portion – which was as high as 70 percent in the mid-1980s – has been declining. However, one microtrend I spotted back in March appears to have continued. The equity portion has continued to grow over the last year, after hitting a low around 41 percent. Americans now own 42.2 percent of their homes. (Data from Federal Reserve Flow of Funds reports.) It's a small change, but it could be a sign that in the face of relentless government efforts to get Americans to raise their own debt ceilings, Americans are beginning to say no. That's a more sure avenue to wealth creation than the get-rich-quick promises of either realtors or stock brokers. 

NEXT: When Ignorance Is the Best Excuse

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  1. Logical, but factor in Bush’s $10,000 gift in the American Dream Downpayment Act of 2003 and the result changes – ownership is far better.

    Nothing better than a Socialist scheme from the GOP to spur home-rectitude – by Gawd!

      1. I will never watch a Youtube.

        If you are too big a pussy to say what you think on your own – then fuck you and your pal Hannity.

        1. I really wish that you would get run over by an 18-wheeler.

          1. Which would make a very amusing youtube sub, watching each of the 18 wheels trying to avoid such trash.

          2. Why? Because I tell the truth about the Socialist Bushpig GOP?

            YES – Dumbya gave away $10,000 to borrowers! And the fucker socialized Medicare Pharma Welfare – and NCLB – and the Spy on America PATRIOT Act!

            Well – excuse me for hating the $1.3 trillion deficit Bushpigs!

            Sorry for that!

            1. “Why? Because I tell the truth about the Socialist Bushpig GOP?”

              SHrIek! BUSHpig! ShriEK! My DaD doeSN’t LOVe ME
              !
              Thanks, asshole, go away.

              1. You know how you get a sockpuppet to go away? You fucking ignore it.

                So why do you keep responding to it?

                1. “You know how you get a sockpuppet to go away? You fucking ignore it.”
                  Works with trolls, too, but…
                  During WWII, the allies adopted the tactic of ‘island-hopping’ leaving ineffective Japanese garrisons surrounded and simply available for safe training of bombing and strafing techniques.
                  So, I just sort of consider shriek to be named “Rabual”.

                2. You know how you get a sockpuppet to go away? You fucking ignore it.
                  So why do you keep responding to it?

                  It amuses me.

                  1. Plus, you see how I calmed it? I am the Sock-whisperer….

                    1. I feel you.

                3. So why do you keep responding to it?

                  Narcissism. It’s a personality disorder. It fuels the blogosphere.

              2. If you run those numbers, you’ll realize he is calling me 3rd Term Bush.

                Fuck you, Shrike.

                If you’re car has a flat tire, you don’t worry about the overdraft on your Master card. You go out there and fix it. Even if it runs up a 1.3 trillion dollar deficit.

              3. And you are just another GOPig.

                Cheerleading Dumbya while he jacked off in Iraq – $2 trillion.

                Licking his hind-end while he fucked America with trillion dollar deficits – culling brush from his ass-tunnel while you praised his Jeebuzness.

                Go suck Rick Perry off – he is Dumbya #2.

                1. “Go suck Rick Perry off – he is Dumbya #2.”
                  MY Dad HAtes mE! ShriEK!
                  See how easy that is?

            2. Shreik, it’s not that everything you just said isn’t true. It’s that you refuse to admit that it’s just part of a continuum, which Team Blue is also in up to their eyeballs.

              Which makes you nothing more than a turrett’s syndrome shill.

              1. I acknowledge the truthiness in this statement.

                All numbers (ClinTON excepted) point to a serious decline.

          3. Bush gets sloppy blowjobs here – you – Mike M. sevo, RC Dean, joshua corning, SIV, Old Mexican, countless others — and I GET CALLED OUT???

            1. Let me say this as plainly as I can so even someone as mentally retarded as you are can understand it: I can’t stand Bush.

              Now why don’t you do us all a favor and go eat a lit stick of dynamite.

              1. OK – I believe you.

                But I am attacked here 24/7 for opposing the GOP Socialism of 2001-09!

                You can see how I resort to defending ClinTONism!

                1. “But I am attacked here 24/7 for opposing the GOP Socialism of 2001-09!”

                  MyDaD HaTESS Mee!
                  Yes, shriek, you should probably find someone who gives a shit.

                2. You’re attacked here 24/7 because you have the reading comprehension of a gnat. Nobody here fucking defends Bush, you dumbshit.

            2. shrike|7.20.11 @ 10:21PM|#
              “Bush gets sloppy blowjobs here – you – Mike M. sevo, RC Dean, joshua corning, SIV, Old Mexican, countless others — and I GET CALLED OUT???”

              MyDaD HaTESS Mee!
              Yes, shriek, you should probably find someone who gives a shit.

            3. Bush gets sloppy blowjobs here – you – Mike M. sevo, RC Dean, joshua corning, SIV, Old Mexican, countless others — and I GET CALLED OUT???

              Maybe if you lisp that, you might get some sympathy.

    1. Re: shriek,
      You know, your nonsensical ramblings have a therapeutic usefulness, as they can give a professional direct access to your soul.

      So they’re not entirely a waste of time. Keep on spewing.

      1. “nonsensical”?

        You asshole conservatives are impervious to what you actually did!

        Dumbya spent us into a permanent $1.3 trillion deficit!

        Now fuck off, please!

        1. “nonsensical”?

          MyDaD HaTESS Mee!
          Yes, shriek, you should probably find someone who gives a shit.

        2. Re:shrike,

          You asshole conservatives are impervious to what you actually did!

          “Conservatives…”

          You are like that guy who goes to a gay bar, gets drunk, and then admonishes everybody there for trusting women who are all whores.

        3. What about Obama’s spending? It’s at least as wrong as Bush’s, if not more so.

    2. Dig the irony of shrike bitching about Bush’s socialist tendencies, even as shrike slurps up Obama’s socialist jizz.

  2. A friend of mine refuses to buy. He’s rented four different apartments and houses in the last two years. The guy’s crazy.

    What we should do if we want a new house is break in and take it, like the government.

    1. Why is he crazy? I’ve rented for the last 5 years, in 2 places, and I’m thrilled. I sold a house in 2006 just before the crash started. Renting is the only intelligent move right now.

      1. I meant he’s crazy for moving so much, and he’s never been kicked out — he just decides to move spontaneously. The babes must love him.

      2. “Renting is the only intelligent move right now.”

        With housing prices reset, mortgage rates at historic lows and the stock market on a roller-coaster. Buying makes no sense whatsoever??

        If you can afford a decent down payment and you actually want to be able to modify your domicile, then owning makes much more sense than renting.

        1. If you can afford a decent down payment and you actually want to be able to modify your domicile, then owning makes much more sense than renting.

          If stuff like putting in granite countertops, cedar cabinets, and ceramic tile floors mattered to me, I’d probably go for it. But I’m happy with a stable roof over my head.

          If people want to buy, that’s fine. But I guarantee I’m a lot less concerned about my personal debt liability then they will be.

  3. One cannot live inside Wall Street.

    1. Unless you’re a member of the federal government — then you get to be thrive in the crony capitalism/fascism that that brings!

      1. You’re not very bright.
        Also, words have meanings.
        You should look at a dictionary once in a while.

        1. Sure thing. Thanks for the tip. πŸ™‚

    2. But you can live inside the apartment you pay for with the money make on wall street. That’s the whole point of this article.

      Though, it seems to me that 70% of people might fail to make a profit in almost anything so maybe it is all bullshit.

  4. “Unless someone possesses the cash necessary to buy a residence, he or she will be renting one way or another.”

    This is simply not true. Renting captures zero capital for the renter.
    You can argue other issues, but this is simply not true.

    1. Re: sevo,

      This is simply not true. Renting captures zero capital for the renter.

      A house is not capital; it’s a consumption good. And food for termites.

      Capital is SAVINGS. A house is a money pit… and a place to put my flat screen and PS3.

      1. “…A house is a money pit….”
        A house certainly can be, but so can renting.
        Sorry, the principal applies; every mortgage payment increases actual ownership to some degree. That ownership is every bit “capital” as is the tooling a factory buys for production.

        1. This doesn’t apply when renting is cheaper than a mortgage payment. If I can rent a house for $1k a month and the mortgage on an equivalent home is $1200, I’m better off renting and it’s not even close.

          1. @False Choice Ferret

            Not true. In the example you gave, if each mortgage payment increases your equity in the house by more than $200 + monthy repair costs, then you are better off buying. (Assuming the value of the house does not change.)

            Also, you have more freedom in modifying a house than you have in a rental. If you want to customize your home, then buying is double-plus-good.

          2. most likely false as your rent may go up but your mortgage payment (ex taxes) will not. In addition, there is a mortgage interest deduction which heavily subsidizes the front end of a mortgage.

            The study also makes the crazy assumption that renters will invest the difference in cost. Sure.. in a larger plasma tv? bmw? or vacation to NZ? The principal payment is in effect forced savings.

            I would also point out that with all the hysteria about the drops in home prices in the past 4 years, one can find other times in history that prices dropped substantially. In the late 80s-early 90s things tanked. My home I bought in 92 dropped nearly 15% in the two years after I bought – which was at the tail end. It is now worth far more, even after the recent debacle. The larger problem is that one should always match assets and liabilities, ie dont fund a long term asset with short term liabilities. That also applies to what type of asset to buy – if you will only own for a relatively short time, dont buy a long term asset.

            1. your rent may go up but your mortgage payment (ex taxes) will not.

              Even the tax component of your gross mortgage payment isn’t that bad. You can deduct property tax on your federal return. It’s ridiculous that Uncle Sam subsidizes high-tax states this way, but that’s the way it works. If your property tax goes up by $1,000 and you’re paying the top marginal rate, you save $396 on federal income tax.

              And I strongly concur that the forced-savings component to home ownership is a significant factor that tilts the balance towards owing. I’m a smart, educated, fairly successful guy who got to where he is by showing a lot of personal discipline, but if I started renting and it freed up $500 every month, there’s no way in Hell that I wouldn’t spend most of it on hookers and blow.

            2. “if you will only own for a relatively short time, dont buy a long term asset.”

              and given that the average home owner only stays in their property for 5-7 years…that would be a huge issue for most of the US.

              You also failed to take into account the depreciation factor of homeownership. Every aspect of a home, from the roof to the floors to the appliances is constantly decaying. So you have to consider the money that you dump into the maintenance of a home as well.

              As far as the mortgage interested deduction that only comes into play at certain levels of home value and isn’t necessarily as a big a boon as you say.

              I currently live in a 2br row home in S. Philadelphia (which is one of the few places where it is cheaper to own than rent, but I wont buy because I plan on leaving in 3 years as I would never put my children into Philadelphia schools). If I had bought this current house for 100k, I’d have about $6,500 in the first year in interest (and since my girlfriend and I are not married I’m pretty sure we’d have to split that on our returns for $3250 each). The standard deduction is $5,700. If I have no other items, how am I going to take advantage of this?

    2. Since rent on a typical house is currently less to slightly more than or interest/taxes/insurance would be to buy that house, this is not correct. The renter keeps the difference between their rent and what their carrying costs might have been. A person who had a pile of cash and rented House A for 2-3 years is likely to have more cash+equity than a person with the same amount of money who bought the identical House B due to the increased cost of ownership and likely depreciation of House B.

      Now if you had a traditional 20% down mortgage or better, you are likely to come out ahead as long as you aren’t assuming a very high return on the opportunity cost.

  5. Presuming you’re not under water, it’s true that ownership [today] at least provides an avenue toward wealth assembly, but even that advantage diminishes because government policies don’t encourage real estate ownership; they encourage the debt associated with real estate ownership.

    This is a very important point, as debt is what fuels the current monetary system; it’s the FED’s game. Real estate assets are plundered and despoiled by local and state governments, and even the Federal government: Hence, the FedGov is NOT interested AT ALL in people owning assets for the sake of ownership, it is interested in putting everybody in hock!

    1. “Real estate assets are plundered and despoiled by local and state governments,”
      To expand on this a bit, consider those areas with “rent control”.
      Not only is the asset devalued, but by gaining renters, the local lefty politicos have increased the number of voters hoping to stick their hands in the pockets of property owners.
      BTW, it doesn’t work; see rental unit supply and costs in “rent controlled” areas. The small owners and the renters lose. The large owners and attorneys win, and I’m sure this was ‘unintended’.

  6. It’s a small change, but it could be a sign that in the face of relentless government efforts to get Americans to raise their own debt ceilings, Americans are beginning to say no. That’s a more sure avenue to wealth creation than the get-rich-quick promises of either realtors or stock brokers.

    What I don’t see these studies talk that much about is probably one of the biggest factors in this entire economic mess we’re in -the fact that an enormous percentage of the real estate loans people took out in the last ten years weren’t even remotely realistic in terms of debt-to-income ratios, and then these same people added another $50k+ (+++) in equity debt when they used the real estate as a credit card. All this was made possible by the Government removing the risk banks took when they made the loans in the first place through FM&FM;.

    Banks then handed out ridiculous credit lines based on the real estate. People ran them up. Then they couldn’t pay either the mortgage payment or the equity interest payments (both in a lot of cases). Now you have entire neighborhoods that are empty across the country thanks to the combination of irresponsibility between the government, banks and the people who bought the houses.

    You can argue that a home is a bad investment decision, but if you put 20% down on your house ten years ago and made your payments, you’d be 1/3rd of the way done with a 30 year mortgage by now, and even if your value has gone down you’d still be well above water.

    Oh, and you’d have a place to live for ten years with a shower and everything instead of a piece of paper with your name on it.

    1. 20% downpayments, why only crazies obsessed with Dave Ramsey would engage in such a foolish endeavor!

      1. 30-year mortgages are for suckers. Look how many suckers during the bubble took out 30’s, then refi’d into new 30’s. You build equity too slowly to matter with 30’s.

        The 30 was supposed to be a short-term fix of the New Deal. It was/still is criminal that the government encouraged people to take out 30’s after WWII.

  7. Really, using this logic one should never buy anything. Use Rent-a-Center for all your needs because you’ll never get back what you paid for any of it.

    Also, when these calculations are performed is the fact that rent for similar properties is higher than a mortgage/insurance for a similar property. I’m looking at this right now and in my area a 20year/20%down mortgage payment is about half as much as rent for similar properties. Which means that I could be saving and investing that additional money and still have a nice place to live that I’ll be able to sell one day. And, even if I sell at a loss in the future it will definitely be more than the security deposit I’d have to fight to get back had I rented.

    1. Re: capitol I,

      I’m looking at this right now and in my area a 20year/20%down mortgage payment is about half as much as rent for similar properties.

      You can always give 30 days notice to your landlord. Try instead selling a house you need to leave.

      You are paying a premium when renting over ownership, but buying a house is the same as buying a ball and chain for yourself. I am willing to pay that premium for the benefit of being able to flee.

      Also, rentals come with maintenance included [not all, but many]; on a house you own, YOU pay to keep it up.

      1. “You are paying a premium when renting over ownership, but buying a house is the same as buying a ball and chain for yourself. I am willing to pay that premium for the benefit of being able to flee.”
        That is certainly your choice, but liquidity is expensive.

      2. I refuse to live in another apartment building so I’ve been doing my own maintenance for years. My current landlord doesn’t send out fast competent workers so we do our own work. Granted I’ll take off what I from rent, but my calculated maintenance costs for buying aren’t above what I’m willing to pay.

        As for freedom, most landlords around here require at least a year long lease. If you terminate then you’re required to pay. Besides I live very frugally and always have enough cash on hand to cut and run if need be.

      3. You can always give 30 days notice to your landlord. Try instead selling a house you need to leave.

        Rental of any half way nice property come with year leases. You can always sell in less time than it will take to finish out a lease. You may have to dramatically lower the price but you can sell quickly.

        Not too mention that rents increase yearly, plain vanilla mortgages do not. My kids pay the same to rent one bedroom apartments as I do for my mortgage on a 2,500 sq ft house in a beach community.

        1. Mortgage may not rise but PROPERTY TAXES seem to ALWAYS RISE. And, unlike rent control, PROPERTY TAXES are not regulated.

          1. Not in CA they don’t.

            That one good feature almost makes up for the rest of the idiocy of the state government. Almost.

          2. In FL, my property taxes have gone down for 3 straight years. And the assessed value on my house is just now (after prices in my neighborhood fell by 1/3rd) coming in line with the saleable value. Leon County does that part just fine.

          3. Increasing property taxes are partially offset by the ability to deduct those taxes on your federal income tax return. Having your rent go up by $100 is worse for your bottom line than having your property tax bill go up by $100, provided that you itemize, which you’re probably doing because you’re paying mortgage interest.

        2. Rents will not ALWAYS rise, and even when they do it’s not as though they are dramatic. I’ve certainly live through multiple stints of coming off a year long lease and going month to month at the same rate. Yes, these places were “half way decent”

      4. I rented from 10 different landlords over 10 years before buying a house. For every one the maintenance was included in the rent, but I found that getting them to actually perform the maintenance was hit-or-miss. Some were good about it always. Some were only good if it was a major issue (heat in winter, stove won’t work, etc.). Some ignored me entirely.

        When you own, you control how and when the work gets done. I like that.

    2. Does your area not have property taxes? Do you understand the concept of opportunity cost on that 20%? Are the places you call “similar” actually ripped apart foreclosures?

      Around here it is very hard to find a place worth buying that you can get for less per month than rent at 20% down.

      1. The rental market around here for houses is abysmal. It’s to be expected as Pittsburgh has a huge mobile population because of all of the local universities.

        We’ve been on the hunt for over a year now and the homes for sale are of a higher quality and in better neighborhoods than the rentals; for less money.

        And yeah, that 20% could be spent elsewhere, but damn I’ve been saving money forever and would like to have my own home that I can improve as I like.

        I don’t like living in someone else’s house, and being in my own is worth using some of my savings. It may not be totally rational, but it comes from the same place that drives my political beliefs.

        1. This is totally rational, just don’t buy because you’re making a good investment. Buy because you want your own house. It sounds like this is your approach, which is good. More people need to at least think this way. I don’t know how many people I hear saying stuff like, “I did great when I sold my house. I sold it for $80,000 more than I paid for it.” But they don’t consider inflation, the taxes they paid, the insurance they paid, the commissions and brokerage fees they paid, the maintenance they did, and certainly never consider the opportunity cost of investing the money in other ways. I guess the fact of the matter is, most people are dumb, which is all too evident when considering the people they have elected to represent them.

          1. I look at it more like buying a car. You buy it, get many years of use out of it, put a lot of money into it, and if you’ve taken good care of it you’ll get some money out of it when you need a new one.

            But, certainly not an investment.

      2. “Does your area not have property taxes? Do you understand the concept of opportunity cost on that 20%?”

        Uh, proposing a 20% property tax would certainly change the equation.
        But so would claiming ‘the world’s gonna end tomorrow!”

        1. actually, I think 20% is a reference to the downpayment, not the property tax.

    3. The difference is that I can buy the things available at Rent-a-center outright by saving for them. You’re better off comparing rent-a-center to buying all my durable goods on a credit card.

      Rent-a-center’s viability as a solution for all my appliance/furniture/whateverthefuckelsetheyoffer needs would be dependent on the fees they charge vs. the interest rate on my credit card.

      Your argument as you presented it though, is not an apples to apples comparison.

  8. It’s best to think of a home as an end product, not an investment. Buy it if you can afford it and think it’s worth the money to own it. Don’t buy beyond your means with the assumption that you’ll get twice what you pay when you resell it.

  9. The equity portion has continued to grow over the last year, after hitting a low around 41 percent. Americans now own 42.2 percent of their homes. (Data from Federal Reserve Flow of Funds reports.) It’s a small change, but it could be a sign that in the face of relentless government efforts to get Americans to raise their own debt ceilings, Americans are beginning to say no.

    I think it is far more likely that this is a result of people with very low equity being foreclosed on, bringing up the average. The fact that it was so small of an increase just shows that we’re getting a lot more people jumping in with 3.5% down to replace them due to said relentless efforts.

    1. In some of the links above, I have a bunch of caveats making this point.

      However, consider this: If you’re employed, as most of the foreclosed are, even getting foreclosed increases your disposable income, because your money is no longer committed to servicing that pile of debt.

      Theoretically, you can now start banking that money (or the difference between your current rent + storage and your previous mortgage payment). Practically however, a person who ended up in foreclosure is unlikely to be following sound personal finance principles.

  10. The city I live in, it’s a few hundred dollars cheaper to buy a small house than it is to rent an equally nice townhouse. And much more to rent a house.

    But, it’s a city that’s been dying for a long time, so maybe that’s why.

    1. Don’t forget that rentals follow the laws of supply and demand too. I live in a small city of about 12,000.

      Thanks to a school bond voted in by the idiots here, we have one brand-new elementary school being built, and major overhauls of two others.

      Many of the construction workers for the large firms live 2-3 hours drive away. They have to have someplace to live. We also had a 500 year flood two years ago, which displaced a lot of homeowners and drove them into the rental market. Rental properties are extremely scarce right now, and are priced accordingly.

  11. The hassle of owning land (or worse, a condo) is arguably worse than the hassle of actively investing, where only paper money is at stake and you can get out at any time

    Stocks can go to zero and it is pretty hard to get insurance for a stock portfolio.

    Plus homes are pretty easy to understand vs how the fuck the stock market works.

    government policies don’t encourage real estate ownership; they encourage the debt associated with real estate ownership.

    Yup. Plop down as much as possible with the down payment and pay more each month then the bank is asking you to pay and do it early. The more you pay early on during your mortgage the more you will be paying into equity rather then interest.

    Anyway all this is pretty easy to understand and easily gamed so as to beat the 5.2% you can get if you rent and invest the difference.

    That’s a more sure avenue to wealth creation than the get-rich-quick promises of either realtors or stock brokers.

    By the way Realtors make a commission on homes they sell as rentals just as they make a commission for selling homes as homes.

    Are the realtors who sell rentals more or less “evil” then realtors who sell homes?

    1. If you’re asking me, I don’t think Realtors are evil at all. I do think there was a good long period when NAR advertised real estate as a high-return investment rather than as a reasonably reliable place to store surplus value. (Which it generally is, even factoring in the last five years.)

      1. And of course, I mean to say “Realtors?.”

        Peace and love!

    2. Stocks can go to zero and it is pretty hard to get insurance for a stock portfolio.

      Sure you can. They’re called “Puts.” Also, “Stop-loss.” LEAPS, etc.

      That said, The Bernanke is clearly manipulating the stock market as we speak, much as the Fed Gubmint spurred mal-investment into housing over the past couple decades, so a serious correction is likely one of these days, and then, you wonder what makes a good investment.

  12. Every situation is different. For some it is better to own, for others to rent. Youve got to figure in property taxes, type of mortgage, possibility that you will need to relocate, the mortgage interest deduction, local housing market trends, local costs of renting a smiliar residence, etc. Sometimes it does make sense to walk away from a mortgage. But I think a lot of people who are doing so are cutting off their noses to spite their faces. In many if not most cases the lender can come after them later for a deficiency judgment. And unless you are majorly underwater the costs of walking away may exceed the costs of staying put.

    Also there is something to be said for the idea of paying off a home so that you own it free and clear, and at some point there is no need to pay rent or a mortgage.

    1. In california, florida, colorado, and several other states, the deficiency judgement cannot be captured by the creditor. The property is COLLATERAL and once returned…that’s the end of it. These are no recourse states. New York and New Jersey are Single-action state where they, effectively, don’t go after the deficiency.

      And, don’t forget, you can always declare bankruptcy (or threaten to).

      I must know ten, or so, people that have walked away in NYC and NJ.

      NOT THAT I don’t agree with you. The market may come back…but I doubt it.

      Until salaries rise and jobs come back, there’s NOTHING happening in the Real Estate Market. And, when I say JOBS, I mean real jobs with benefits that actually pay money. Not these N-gger jobs that pay no money and no benefits that I see being created today.

      1. You don’t come around for a year and then you show up droppin’ n-bombs. Jesus Alice, you’ve gone off the deep end.

        1. Maybe him and shrike can team up and bitch about Herman Cain while extolling the virtues of Obama.

      2. Even in a no-recourse state, the bank will 1099 you for the difference in the mortgage balance and what the house fetches at auction. There’s nothing like enough phantom income to move you up a tax bracket…

      3. I know 2 who have walked away from upside down condos. GA is a recourse state and the lenders here generally have not come after the defaulters–yet. I think they will in the future, after the backlog of foreclosures eases, esp. defaulters who are current on all their other debts (e.g. they had the money to pay the mortgage, but defaulted as a business decision).

        Bankruptcy is always the nuclear option. But if you have income/assests above a certain amount the judge might not allow you to walk away entirely.

      4. Alice you are right about the RE market, it is going no where but down for the foreseeable future. The banks have a “shadow inventory” of foreclosed properties that are not on the market, because if they were it would drive prices even lower. Prices will keep dropping until they hit the natural bottom–a point I define as being where the average person (single wage earner) can afford the average home with a 20% down payment and standard fixed rate mortgage.

        We ain’t there yet.

  13. Location, location, location.
    A shirt-tail relative bought a place outside of Reno in 2007. There is no lack of land around there, and no reason to pay more than the land cost plus construction costs. He paid more; cheap (early) interest and he bought into the ‘it’s gotta go up!’ theory. The result was predictable.
    The market always works; some buyers make it work less efficiently.

  14. Americans now own 42.2 percent of their homes.

    Huh?

    1. I think this means something like: The probability that a “head of household” is either currently required to be paying on a mortgage or “owns the house outright” is 0.422.

      1. More like the total equity in all owner-occupied houses / the total value of owner-occupied houses.

        Not sure if underwater houses count as zero or a negative number in those calculations. Probably zero.

        1. no i think there is no total value inserted in the equation.

          They just look at how much of the principle home owners have payed on their mortgage (plus probably their down payment as that is all principle on the house) then average it.

          You can pay off say 10% of the principle of your mortgage and still be underwater.

          Then there are those who payed only interest payments then missed payments or took out second mortgages or refinanced and now owe more on their loan then they payed for their house…those are probably counted as zero rather then negative.

        2. Pretty sure it’s equity/outstanding mortgage.

  15. Cop threatens to execute concealed carry holder during traffic stop.

    http://www.youtube.com/watch?v=kassP7zI0qc

    1. Just another isolated incident. Dunphy has assured me that cops aren’t bullying sociopaths, and his personal experience=hard data/constitutional legal analysis.

    2. I had to watch it on mute and read the transcript so I didn’t ragebreak my computer.

      This is why even having a concealed carry permit in a very permissive state still makes me want to avoid even traffic stops at all costs, because the cops consider the peons having guns an affront to their superiority, even in a state like WA where the CCW permit rate in the population is one of the highest at 5%. You get the wrong cop pulling you over and then your having a permit and daring to carry is now an insult to them, since only they should have guns, according to them.

      And I carry one of my multiple carry guns at all times. I hope that Canton cop gets reamed, but I doubt it. I would sue.

      1. That cop deserves to be caught and branded with a print of the 2nd amendment on his useless ass as a warning to the others.

        Legal action is not an effective deterrent to oppressive thuggery.

        1. Take his job, publicly humiliate him, and then stick him in jail for a few months with some of the people he collared. That would be an effective deterrent…

          Local news should run that footage morning, lunch and evening every day for a week.

  16. The cosmopolitan theory of home-ownership goes hand-in-hand with voter turnout. Owners are more likely to vote and participate in local politics than renters. That’s true, but participation in politics does not go hand-in-hand with wisdom.

    There just doesn’t seem to be much, in a democracy, to stop a home owner from rent seeking local businesses to pay higher taxes for schools and police.

    It takes 5 to 10 years to drive a business out of town, but only 2 to 4 years re-elect a crappy politician.

    Unharmonious.

  17. Where is this extra money coming from for renters to invest? People who know what they are doing rent out property at a higher price than what they pay. of course this isn’t always the case.. but, for example, my house could be financed for around $600 a month ( add around $200 for taxes), but rent would be at least $1000, probably around $1200. I could rent a really small apartment for what my mortgage costs, and have no extra money to invest. The only way I could save money to invest by renting would be some kind of roommate situation ( I’m an adult with a family- so that’s out).

    I DO agree with the basic premise that there’s nothing wrong with renting or “better” about owning. It comes down to preferences more than economics for me.

    1. agreed. Some people don’t want to be at the mercy of a landlord. They want stability and want to live in a home and not an apartment.

      These are definitely personal choices in which one can’t simply put a price on.

      1. Re: Alice Bowie,

        They want stability and want to live in a home and not an apartment.

        The stability that eminent domain can deliver, or property taxes…

        1. You can look at your local history to get a good handle on those risks before you buy. There’s no guarantee, but that’s life.

      2. You can put a price on that choice… look at the difference in cost between buying and renting (such difference possibly being negative).

  18. This article is so silly. I’ve made at least $1mm between 1992 and 1995 and merely lost (not actualized as I’ve not sold yet) about $150k since.

    It paid to OWN…at least for me it did.

    1. I meant 1992 and 2005

    2. Sure you did, Alice. Sure you did.

      1. House prices in CA today are about 300% higher than they were twenty years ago and 50% higher than they were ten years ago.

        Prices will begin rising again at some point. Never bet against government generated inflation in the long run.

  19. I rented for about 8 years, and have only owned for 4, but I can say, my property taxes have gone up less than the rent did every year. Not to mention that we have a great deal more space (1,700 sqft) for roughly the same cost as renting a 1,000 sqft apt (in Dallas).

    I don’t have to deal with scarce parking spaces, neighbors being too loud, and can install whatever decorations I please. My utilities are also much lower (due to better insulation and a better a/c unit than I ever had at any apt. complex). When something breaks or goes wrong, I can fix it immediately, to my satisfaction, instead of waiting days for a half-assed, cheapest possible repair to be done. I know I’m paying for it…but it’s worth it for me.

    It’s all a subjective value judgment, and as to the economic facet, that is different in each location. I don’t think any of us can make blanket statements about what is better or best for anyone else. I personally had many bad experiences renting, and have loved purchasing so much more that I would never want to go back to having to dance to a landlord’s tune (much closer and more in my immediate business than the local gov’t seems to be).

    1. When something breaks or goes wrong, I can fix it immediately, to my satisfaction, instead of waiting days for a half-assed, cheapest possible repair to be done. I know I’m paying for it…but it’s worth it for me.

      Exactly.

      1. And you can have a cat, or three cats. You can have a dog weighing more than 25 lbs. You can do these things without having to live in some dumpy stack-a-prole apartment complex because those are the only ones that allow pets. Sounds grand to me.

    2. You’re right, Jim, that there are certain features to both situations that are attractive to different people. I love renting, since it gives me all the things I want:

      1. Mobility: I can leave whenever I want, and am not tied down.
      2. Repairs: I make a call and they’re done while I’m at work. Costs me no money nor labor.
      3. Amenities: I have a pool, a workout room, tanning booths, a clubhouse, and more, all as part of my rent. I put a pool in at my house in NY, and that shit ain’t cheap, and requires a lot of maintenance. Here, they do it.
      4. No property taxes: my taxes in NY were $10,000 per year. That makes the rent factor a bit different.

      I’ve also had very good experiences renting, and am a very good tenant. Just to make all the Manhattanites out there jealous as fuck, I had a 3 room apartment on the Upper East Side in Manhattan, with a huge kitchen, a roof outside the kitchen window that served as a porch, and hundreds of square feet…for $1300/month. Pure luck that I found it, but even after 5 years there my rent was only in the mid-$1400 range (we can discuss the distortion effects of rent control–which this apartment was not–another time). Yeah, that was a hell of an apartment.

      1. What if you’re a misanthrope?

        1. Then get an apartment in a building that isn’t social and has few apartments in it. Or rent a house. Both these situations are common.

          1. Calm down Captain Rent, I was being flippant.

            1. Listen, Captain Flippant, I don’t need your flippancy. Or something like that. Flip this.

                1. Speaking of flipping, we should have a thread sometime where everyone says the opposite of what they believe. Including the trolls.

  20. “YES – Dumbya gave away $10,000 to borrowers! And the fucker socialized Medicare Pharma Welfare – and NCLB – and the Spy on America PATRIOT Act!”

    True… so, why doesn’t Obama repeal all of that?

  21. It’s bullshit really. The first payments go to interest but the last goes to principal and in between, a mixture of both.

    The other benefit is caused by inflation. My grandmother is paying her 6% a year (we’re abroad) on a principal of about $15,000 which is what her property cost in 1985 or whenever. Now the rent on the property would be $30,000 per year and her repayments are about $1000 annually.

    1. “The first payments go to interest but the last goes to principal and in between, a mixture of both.”

      Yes, however the average length of homeownership is only 5-7 years (according to the NAR).

  22. There’s an anomaly in Southern California where you can rent a 6 bedroom house from a Prop 13 landlord for less than the property tax you’d pay if you owned the house outright.

    Here I am.

  23. This thread exemplifies why I hate Finance.

    Hermit in a Cave time for me.

    1. (provided I can afford the cave-payments of course…)

  24. There’s a lot of debate about home ownership… buy or rent, 15 yr vs 30 yr, Fixed rate vs ARM, pay on time or pay off early.

    Things to consider:
    1) Interest rates are incredibly low. The best thing is a fixed rate because interest rates will eventually climb.
    2) Property values have not bottomed out, but if the economy recovers, they will rise. So you will end up paying more in rent than on a mortgage.
    3)Location, location, location.
    4) 30 yr may have a higher interest rate, but are not locked in at the higher mortgage payments and can pay more towards the principle if you pay a few hundred dollars more a month. When times are good, you can make those extra payments. If they are bad… well, you can just pay the minimum.
    5) With interest rates so low, you’re actually better off investing your money as opposed to paying it off early. The market is beating the interest rates, so you will have more money in the long run.
    6) Paying off early means you spent more real money since inflation will make your debt smaller. Though the actual dollar figure won’t shrink because of inflation, the value will.
    7) Your monthly payments won’t go up year after year, except for taxes (possibly) and insurance (definitely). But those won’t raise at the rate rental payments will.

    But these really depend. If you’re not going to be staying in a home for a long time, then don’t buy.

    1. 1) Interest rates are incredibly low. The best thing is a fixed rate because interest rates will eventually climb.

      Why will they eventually climb, or, more importantly, why will they climb faster than market projections? The prospect of a rate increase is more or less already priced in the market. There are some technical factors that cause a divergence between expectations and where the market is — hedging requirements of insurance companies, for example — but the best argument for a fixed rate right now is just that it’s the most liquid and thus has lower costs for borrowers.

      But long-term interest rates still have plenty of room to fall. The 30-year swap is at 4% (Japan’s has been below that since the 90s), and the market is pricing in a large increase in rates around 2-3 years out. If that fails to materialize you could absolutely see floating rates outperform fixed rates.

      1. Do you honestly see interest rates falling below inflation? It would hurt lenders to loan money if they were losing money by doing so.

        1. Well, yeah, I can, because short-term interest rates are currently lower than short-term inflation. What matters for banks is controlling the asset-liability mismatch, making a margin, and then levering that profit several times. Banks can make money lending at less than inflation as long as they borrow at far less than inflation and have adequate leverage. That’s basically what’s occurring right now.

          Also, lenders are price takers. That is, they don’t have a choice of where to lend at; the market dictates interest rates. In some cases, the least bad option is to lend money at a loss because it’s the smallest loss and better than sitting on the cash, like in the S&L crisis.

    2. The best thing is a fixed rate because interest rates will eventually climb.

      Not if you’re a lender. (See: 1980’s S&L crisis.)

      Unless you’re getting backstopped by the taxpayers.

  25. So many of these rent v own articles miss an obvious point- you can’t rent a lot of the types of properties that you can buy and usually the rentals are of lower quality. Try going to a single family housing subdivision in a wealthy suburb and look for rentals. There are very very few.

    1. Good point.

      Still, most people fundamentally misunderstand the nature of homes. They are not investments, any more than you car is. They are durable consumer goods. Like your car. Outside of a few anomalous markets, when you factor in all your costs (maintenance, taxes, insurance, and of course inflation, etc.) its hard to show a positive return on your home.

      1. Really?

        Then why do landlords rent out property?

        1. You’re comparing two different markets.

  26. How did I know this would be a clusterfuck Shriekfest?

  27. As a single guy who doesn’t get all that sentimental about his domicile, renting is working well for me. I’ve been in my current apartment 10 years because the complex is well managed.

    I’m not sufficiently finance-savvy to argue on the financial side of it, but I can’t help but noting that what with all of the government meddling in private property we don’t really own anything we buy nowadays. Sure, you can do what you want with a house you buy–if the government approves. I don’t call that “ownership”.

    1. Exactly. If you own something, it is yours free and clear. You do not have to pay someone else for the privilege of using it.

      If you have a mortgage or a property title and you think you “own” your home, just stop paying your property taxes and see what happens.

      1. More importantly, if you own something then you’re the one who gets to make decisions about it. If any important decision is subject to government override, I don’t figure you really own it.

        1. Then you don’t own anything.

          Including your own body.

    2. Going with your first comment…

      I have never liked living in apartments. I hate other people’s noise, and I like to get a little loud sometimes. But does that mean I will get loud at the expense of others? No. But I was quiet while living in apartments and much louder in a house. So, I can rent a house. But I can’t make the house the way I want it, and I don’t want to waste money on a yard that isn’t mine.

  28. ITT: renters vs owners.

  29. Of course home ownership is a scam. I see my home-owning friends, and every other week-end they’re at a Big Box home store. They’re constantly fixing things, building things, repairing things, putting things in. Maybe they enjoy it, I dunno, but it looks like the house owns them. (As in Soviet Russia)

    1. I think that’s a useful point to consider along with the financial: the value of one’s time. I know people who very much enjoy doing home improvements, so it’s a good choice for them. I have other hobbies and utterly hate doing home improvement. So it’s not a good choice for me.

  30. It’s better to rent than buy anything that flies, floats, or fucks.

  31. If renting is a better deal that owning then why would anyone own the buildings that are being rented ?

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