Read an Interesting Article - Homeownership

[asphaltgambler]

Tried to find the source, could not. The article was written from the point of view of an expert on personal finance concerning the new or first time home buyers. Where basically in the current economy, for all sorts of reasons, that renting is more financially sound principle than to buy given the current market.

He had demonstrated that the stock market had consistently out performed real estate over the last twenty years. To the tune of 11% vs 6% averaged. That the current real estate market will bounce at or around the bottom for a while until.......................

Cost of borrowing $$$ starts to increase. That the Feds are to some extent subsidizing low interest rates by "proping up" and being that prime rate is the lowest since the 1940's that the cost of borrowing has no where to go but up. You know what happens to real estate prices when the % goes up? - price effectively comes down - a logical inverse relationship.

Couple an increase of say 2-3% on the consumer end for borrowing - add all the homes that have been foreclosed on, but not on the market and the homes that are in the process of foreclosure and values will drop further than most anyone can predict

Anyone here see this article or can chime in with their point of view?

[kaisen]

I read it in a Men's Health or GQ in 2007, I think

[bleucamaro]

Right now, it may be better to put the money in stocks, who knows, but also with a depressed (or corrected) housing market and low interest rates it seems like a good time to buy, remember, buy low, sell high?

One of the things that article that demonstrated how the stock market out performed the housing market probably didn't take into consideration was the power of leveraging. In order to buy $300k in stocks, I need to have $300k in cash. In order to buy a $300k house, I only need $60k. Now, if you consider $60k in stocks at 11% vs a $300k house at 6%, it will take WAY longer to beat it.

We decided to buy our first house a year ago because we couldn't rent a house for as cheap as we can make payments on our own place. Our $200k loan costs us a hair over $1000/month, and insurance and taxes are about $325/mo. To rent this same house would probably cost us $1500/mo, so, it was worth it to buy.

I'm sure there's a 100 guys on here smarter than me who will argue contrary to my opinion, but it is what it is.

[RWebb]

buy low, take the tax deduction and enjoy your subsidy

some states give a tax break for renters (Orygun) but the feds don't

[RPKESQ]

Home ownership needs to be defined.

Home ownership is when you own a house free and clear. This is a very good thing. It is virtually an essential part of a comfortable retirement for most people.

Home ownership is not when you have a mortage. You are in reality, just "renting to own". Borrowing on any "equity" on something you don't really own is the height of stupidity from a financial POV.

Home values have remained constant as a percentage of income in the US since at least 1880. In Europe the home sales records go back much further. In Amsterdam, home values have remained constant since the 1600's as a percentage of income.

Homes are extremely poor investments. But they are extremly valuable as bringing financial stability to you long term.

Buy the smallest house you can get by with. Pay cash for as much as you can, take out the smallest mortage possible. Pay your mortage off as soon as possible. Now you own the home.

[GH85Carrera]

I understand the house is not the best investment, but you HAVE to live somewhere. When I bought my first house I put some money down, and did a 20 year mortgage. The monthly payment was about the same as renting a small house or nice apartment, $375 per month. In fact when I got married I rented the house and made a little money. When I sold the house I had some real equity that we rolled into our current house. We had a 15 year note on our current house and it is now paid for.

If I had just paid rent I would have just lost all that equity I built owning a mortgage. I had a house that I could use as I saw fit. And the payment was never going to go up like rent does.

[McLovin]

Originally Posted by asphaltgambler

He had demonstrated that the stock market had consistently out performed real estate over the last twenty years. To the tune of 11% vs 6% averaged. That the current real estate market will bounce at or around the bottom for a while until.......................

chime in with their point of view?

And, that return probably doesn't take into account the fact that stocks really have no "ownership" costs. A few bucks to make a trade, but you're not spending $15K for a new roof on a stock.

Home ownership has many costs that most people don't calculate into their "return on investment" numbers. Most believe if you bought 10 years ago for $100K and sold for $150K, you've made a profit of $50K, and that's just not a good calculation.

I agree with the point of view. I view a residence home as a liability, not an asset. Because the home generates no income, but incurs liabilities (costs).

Now, it's a necessary liability b/c you need to live somewhere. To minimize the liability, I paid mine off as soon as possible, so there is no loan liability on it anymore. But there's still plenty of other liabilities remaining even with no mortgage - property taxes, maintenance, utilities, repairs, insurance, etc. These are costs that a renter doesn't incur (other than sometimes utilities).

Essentially, I did what RPK suggests. I bought a smaller sized home than most (on the small side for the area), in a great area, put a good amount down and paid it off fairly quickly (less than 10 years). I learned it from my parents, who did the same thing throughout their lives, and if I can end up financially where they are right now, I'll be very happy with that.

Again, I'm not saying it is not a good idea to buy a house, I think that it is. But I think there's a right way (or a "better") way to do it, and also I think it needs to be viewed realistically as a financial "investment" (which i think most do not do).

[TheMentat]

Originally Posted by RPKESQ

Home ownership is not when you have a mortage. You are in reality, just "renting to own".

False. In reality, I own the home, and have given a mortgage to a lender as collateral for a loan.

Originally Posted by RPKESQ

Borrowing on any "equity" on something you don't really own is the height of stupidity from a financial POV.

This needs explaining.

[1990C4S]

I would prefer to own a $500,000 home outright, than renting and having my $500,000 invested elsewhere. (Even though I also pay property tax on my home.)

Not everything comes down to dollars and cents.

I own a 911. A used Kia would be 'a better investment', but I still choose to own a 911.

[RPKESQ]

Originally Posted by RPKESQ
Home ownership is not when you have a mortgage. You are in reality, just "renting to own".

Originally Posted by TheMentat

False. In reality, I own the home, and have given a mortgage to a lender as collateral for a loan.

No, you do not own the home. You "own" all financial obligations (taxes, loan, maintenance, insurance, etc.), but just miss a few mortgage payments and see who really owns the home. You can use all the common financial BS terminology to describe what you are, but until you own the home free and clear, "homeowner" is inaccurate regardless of who uses that term.


Originally Posted by RPKESQ
Borrowing on any "equity" on something you don't really own is the height of stupidity from a financial POV.

Originally Posted by TheMentat

This needs explaining.

If you owe on an asset, you really do not own it. See above. Taking out a loan on something you do not own outright is compounding the risk on the initial debt and liability. This is not good. It should not be allowed. Would you take a loan out on a car you still owed on?

I am not talking about some emergency, life or death case. I'm talking about people taking equity loans on their home for improvements, toys, vacations, etc.

This is ridiculous and very harmful to both the "renter to own" and the financial health of our financial system. It should, IMO, be outlawed.

[1990C4S]

Originally Posted by RPKESQ

I'm talking about people taking equity loans on their home for improvements, toys, vacations, etc.

This is ridiculous and very harmful to both the "renter to own" and the financial health of our financial system. It should, IMO, be outlawed.

I will agree that it is generally poor judgment, and possibly frivolous, but how is it harmful? Provided you have the equity to cover the loan then who cares?

And what is the difference between borrowing on a car, or using the home equity to pay for the car? Most people have multiple 'loans', cars, line of credit, credit cards, and a mortgage. Provided they have equity and income, who cares?

If I have a $200,000 mortgage on my $500,000 house I am okay, but if I increase my mortgage from $190,000 to $200,000 to take a holiday that's worse?

[sammyg2]

One other intangible to take into consideration:

If you own a home, you most likely live amongst homeowners. people who tend to be responsible, take pride in their property, and have a clue about being respectful.

if you rent, you live amongst renters. People who tend to not give a damn, play their music too loud, take drugs, and end up on an episode of cops yelling "throw his ass in jail!"

Of course that's an exaggeration but it is based in some truth.

More renters are closer to the definition of low-life than homeowners. Unless of course you live next to UNO in ARIZ

[sammyg2]

Originally Posted by 1990C4S

And what is the difference between borrowing on a car, or using the home equity to pay for the car? Most people have multiple 'loans', cars, line of credit, credit cards, and a mortgage. Provided they have equity and income, who cares?

How many people do you know have a 30 year loan on a car?

I know someone who refinanced their mortgage and took out some equity to buy a car and was still paying for that car 10 years after it was long gone and still had another 10 years to go.

[asphaltgambler]

Great points of view so far. But concerning new /first time buyers most do not have the $$$ to buy out right or make a substantial paydown of 40 % or more of the sales price. According to his/her article the most interesting thing no one has addressed so far is what happens to the homes value if you buy now or in the next year and the interest rate starts to climb and hold?

[McLovin]

Originally Posted by asphaltgambler

no one has addressed so far is what happens to the homes value if you buy now or in the next year and the interest rate starts to climb and hold?

What would happen would be the opposite of what would happen if interest rates start to fall and hold.

Or if prices continue to fall and hold.

No one can predict the future. Not even a real estate genius like Snowman, who advised his own daughter to buy a house in So Cal at the peak of the bubble.

[Esel Mann]

RPKESQ if you have a mortgage on a home/property you are still the owner.

The mortgage is simply a document stating that you the owner are using the home/property as collateral for the debt and permit the lender to place a lien on the home/property to protect the debt owed.

[Porsche-O-Phile]

I just bought my first place last month. Factors include my age and retirement objectives (I want to own free and clear by the time I'm 60), the fact I'm just sick of renting and dealing with stupid petty rules (I like being able to do my own thing), the fact that I'm at a point where I need more tax deductions now, my family's needs and the fact that rates were at or near historic lows - and that prices are not likely to do much anytime soon. While the last reason might be a disincentive to own, the second-to-last one is a HUGE one for me. I'm looking out onto the 20+ year horizon (i.e. Not a quick flip or "typical" 3-5 year window like most folks who don't plan on staying that long. I bought with the mindset that I might be here for a very long time - maybe even permanently. Stuff happens. If I end up moving I will likely look to rent this place out rather than sell, but it'll depend on a lot of unknowns right now...

Anyway looking at the 20+ year time frame, I absolutely believe the "plan" of our government to solve its deficit situation is partially to devalue the USD and use deflated money to "pay off" today's T-bills. I've done a lot of reading and speculating about this and frankly I think it's unavoidable. As such, it goes hand in hand with an expected jump (possibly an explosive jump) in inflation once the economy starts turning around... Therefore, inflationary hedges like houses make an awful lot of sense right now if you've got the stomach to sign on the dotted line. Why not buy as much as you can today if you expect to be able to pay it off (or even just a significant portion of it off) with dollars down the road that are worth a fraction of what today's are? Why wouldn't you? It's the exact same thing I expect the government to do with it's debt.

Also I looked at the first time buyer programs available through Fannie and Freddie, realized (correctly it turns out) that they might soon be on the chopping block and decided it made sense to take advantage while I still could. My timing was excellent on that one - a week after I closed the announcement was made that Fannie and Freddie would start being "wound down" though I think you could still go out and access one of their programs today if you were so inclined.

Perhaps the biggest personal reason to me was I wanted to stand strong against all the doubters, doom-and-gloomers, naysayers and pessimists out there. I strongly believe that fortune favors the bold and that we all have the choice of living paralyzed and beholden to our fears (which I'm sure we all have about the economy, employment prospects, our country's future, etc) or living in spite of those fears. For one, I refuse to let myself be made idle by the worry and despair that's out there for so many. At the end of the day it'd be better to have "loved and lost" (or I suppose "bought and been foreclosed upon") than to have never taken a shot when I had the chance. Doing nothing is a 100% guarantee of failure. Even if the chance of success is only 70% or 80% (and I think my odds are a lot better than that!) it's still a hell of a lot better than zero.

No guts, no glory. No risk, no reward.

YMMV

[RPKESQ]

Originally Posted by Esel Mann

RPKESQ if you have a mortgage on a home/property you are still the owner.

The mortgage is simply a document stating that you the owner are using the home/property as collateral for the debt and permit the lender to place a lien on the home/property to protect the debt owed.

On some level of commonly used terminology you are correct (as was the mentat), but in terms of who has what actual ownership of that asset, you are not correct.

Again, if you own the home outright, there are very few ways of someone obtaining ownership against your will. With a mortgage, you always have the risk of repossession from the mortgage holder if you stop paying mortgage payment (same as rent to own). You not only lose the asset, but all the additional monies paid for taxes, loan fees, interest, insurance, maintenance, etc.

For years banks listed property as an asset to be counted even if there was a mortgage on them. This was commonly used to determine Net Worth of an individual, for example. This is quickly changing. Now any asset that you still owe money on is a liability (which is the correct position IMO) to most major banks. And is not counted in the plus column. Why should it be?

[gprsh924]

Originally Posted by sammyg2

One other intangible to take into consideration:

If you own a home, you most likely live amongst homeowners. people who tend to be responsible, take pride in their property, and have a clue about being respectful.

if you rent, you live amongst renters. People who tend to not give a damn, play their music too loud, take drugs, and end up on an episode of cops yelling "throw his ass in jail!"

Of course that's an exaggeration but it is based in some truth.

More renters are closer to the definition of low-life than homeowners. Unless of course you live next to UNO in ARIZ

I am a big fan of stereotypes, but good christ that is a ridiculous generalization.

[Rick Lee]

I bought my first house when I was 25, kept it for eight years. For most of that time, I had two roommates pay most of the mortgage for me. My share was about $90 per month. So I lived ok during that time. When I sold, I made a lot of money, which enabled me to put 20% down on my next house, buy some toys and then live alone. It was a great move all around. Homeownership can really, really suck when you have pipes burst, roof leaks, etc. But it can really pay off too, if you do it right. The fact that I owed the bank money really was a non-issue.