Question for all: How many own their own homes? [Archive]

chopstick

02-10-2007, 02:16 AM

I rent.

The comment about the mortgage payment being 3x the rent does not surprise me in the slightest. Rents are far below estimated mortgage payments (assuming traditional), and have been for a few years.

After the $1 trillion (I am not making that number up) worth of ARM mortgages reset this fall and the housing market begins to REALLY tank (you ain't seen nothing yet, folks), I'll consider buying. Probably not until 2008, though. Property comp values should have fallen significantly by that time in the D.C. area.

2006 4th quarter foreclosures in Massachusetts are 70% (yes, closing in on double) higher than they were in 2005 4th quarter. ARMs are starting to reset and people are getting destroyed when their mortgage payments are going up 25, 50, or 100%, because they didn't understand how ARMs worked when they signed up for them.

Congress is already gearing up (http://www.guardian.co.uk/worldlatest/story/0,,-6400912,00.html) to start blaming the lenders. My only hope is that we not end up with a taxpayer bailout when the defaults really start hitting the fan. That probably won't happen though, as spineless as most politicians are - the cost will probably just get passed on to the next generation.

awesome (http://www.nytimes.com/2007/02/10/business/10markets.html), I can't wait to see what the news will look like when things REALLY head south this fall and next spring.

A more biased (http://www.marketoracle.co.uk/Article320.html) (but more accurate than most mainstream media, I think) source.

The Commerce Department reported an almost 10% median price drop from EOY 2005 to EOY 2006 last winter (http://www.npr.org/templates/story/story.php?storyId=6391287), and that is WITHOUT the ARM hurricane hitting.

If I owned a home, I would sell it right now before the tidal wave hits, rent until the property values plummet, then buy another house at a much lower price and pocket the difference.

That's just what I'd do, though.

NLSoldier

02-10-2007, 02:55 AM

I rent. THe house is pretty much brand new and I think its worth somewhere north of a million or two due to location. rent is 3500 a month and the impression that i get from my landlord is that this covers most if not all of the mortgage payments. I would like to move somewhere cheaper and buy in the near future.

Banks2334

02-10-2007, 03:41 AM

[ QUOTE ]
[ QUOTE ]
i dont spend anything on my home. my renters do. imo your first purchase should be a duplex or better. why pay a mortgage when your neighbor will pay it for you?

[/ QUOTE ]

Where is this limon? This is not close to possible in much of the US.

[/ QUOTE ]
Actually very possible. Depends on how much you put down on the house and how much you jam the renters for rent.

scotchnrocks

02-10-2007, 03:50 AM

I spend about 28% of my income on a mortgage. It sucks right now but whatever.

ckmo

02-10-2007, 09:08 AM

[ QUOTE ]
I spend about 28% of my income on a mortgage. It sucks right now but whatever.

[/ QUOTE ]

If it makes you feel any better I'm at about 31% for the place I just bought but I'm sick of renting.

nyc999

02-10-2007, 10:23 AM

I do research/polling for a living - about 60% of adults own a home (house or condo/townhouse). The number has slowly increased over the past 10 years and is now steady.

I spend about 20% of my overall income on my mortgage.

'Chair

02-10-2007, 10:31 AM

[ QUOTE ]
A more biased (http://www.marketoracle.co.uk/Article320.html) (but more accurate than most mainstream media, I think) source.

[/ QUOTE ]

that scares me.

bd8802

02-10-2007, 11:30 AM

I own my house. It is roughly 22% of my income. A pain in the ass, but SO worth it.

Prime Time

02-10-2007, 11:34 AM

[ QUOTE ]
[ QUOTE ]
A more biased (http://www.marketoracle.co.uk/Article320.html) (but more accurate than most mainstream media, I think) source.

[/ QUOTE ]

Wow this scares me as well.

I own my house w/ around 800K equity.
If the market tanks 50%, I would lose 400K paper gains.
Is there a way to hedge against this without selling? /images/graemlins/confused.gif

that scares me.

[/ QUOTE ]

scotchnrocks

02-10-2007, 11:47 AM

[ QUOTE ]
I rent.

The comment about the mortgage payment being 3x the rent does not surprise me in the slightest. Rents are far below estimated mortgage payments (assuming traditional), and have been for a few years.

After the $1 trillion (I am not making that number up) worth of ARM mortgages reset this fall and the housing market begins to REALLY tank (you ain't seen nothing yet, folks), I'll consider buying. Probably not until 2008, though. Property comp values should have fallen significantly by that time in the D.C. area.

2006 4th quarter foreclosures in Massachusetts are 70% (yes, closing in on double) higher than they were in 2005 4th quarter. ARMs are starting to reset and people are getting destroyed when their mortgage payments are going up 25, 50, or 100%, because they didn't understand how ARMs worked when they signed up for them.

Congress is already gearing up (http://www.guardian.co.uk/worldlatest/story/0,,-6400912,00.html) to start blaming the lenders. My only hope is that we not end up with a taxpayer bailout when the defaults really start hitting the fan. That probably won't happen though, as spineless as most politicians are - the cost will probably just get passed on to the next generation.

awesome (http://www.nytimes.com/2007/02/10/business/10markets.html), I can't wait to see what the news will look like when things REALLY head south this fall and next spring.

A more biased (http://www.marketoracle.co.uk/Article320.html) (but more accurate than most mainstream media, I think) source.

The Commerce Department reported an almost 10% median price drop from EOY 2005 to EOY 2006 last winter (http://www.npr.org/templates/story/story.php?storyId=6391287), and that is WITHOUT the ARM hurricane hitting.

If I owned a home, I would sell it right now before the tidal wave hits, rent until the property values plummet, then buy another house at a much lower price and pocket the difference.

That's just what I'd do, though.

[/ QUOTE ]

I'm sure they'll end up offering some bailout for the ARM crowd. Also, I don't think this will be as big a problem in places that didn't see a huge runup such as Atlanta. When/if prices drop big, it will just create another boom a few years later, it's cyclical. This won't be the end of the world.

mmbt0ne

02-10-2007, 11:52 AM

I rent for about 33% of my after-tax income right now, but that will get cut in half in about 3 more months.

limon

02-10-2007, 12:48 PM

[ QUOTE ]
[ QUOTE ]
i dont spend anything on my home. my renters do. imo your first purchase should be a duplex or better. why pay a mortgage when your neighbor will pay it for you?

[/ QUOTE ]

Where is this limon? This is not close to possible in much of the US.

[/ QUOTE ]

this is in Los Angeles and its no less possible than buying a single family dwelling.

cbloom

02-10-2007, 01:51 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
i dont spend anything on my home. my renters do. imo your first purchase should be a duplex or better. why pay a mortgage when your neighbor will pay it for you?

[/ QUOTE ]

Where is this limon? This is not close to possible in much of the US.

[/ QUOTE ]

this is in Los Angeles and its no less possible than buying a single family dwelling.

[/ QUOTE ]

I mean possible as in the rent on half a duplex is = to the mortgage. I'm very surprised that can be true in LA, must be out in the burbs? I've always thought this was the way to go but I ran numbers and it said I'd have to live somewhere that I really don't want to live.

MrMon

02-10-2007, 02:33 PM

[ QUOTE ]
[ QUOTE ]

[ QUOTE ]
If I bought the place I live my mortgage payment would be like 3X the rent.

[/ QUOTE ]

? I don't see how this could possibly be true. Are you talking about the rent from 1 apt and the mortgage for the whole building?

[/ QUOTE ]

I lived in a house that cost $800k to buy. I paid 1300/month in rent. Typical mortgage payment would be something like $4500 unless you go interest only or something crazy. That was a little bit of an extreme case but is not that far off average in the hot spots of CA. (it was exaggerated because the house itself was a bit run down which pushed the rent down, but the cost to buy reflects the value of the land)

[/ QUOTE ]

When a situation like this happens in hot markets, this is exactly what you should do, rent. And if you own, sell. It's an excellent gauge of a market being overheated, because it compares a pure market to a speculative one. The rental market is always pure because it reflects current consumpion. Assuming one year leases, the owner must rent the property or he risks losing a possible income because the ability to rent is a time expiring asset. You can't rent twice as much next month to make up for the fact that you didn't rent this month. (Airline seats are the same thing.) So you price it to get as close to 100% occupancy as possible, without going so low as to cause demand to increase beyond 100% capacity.

Straight ownership, however, is a speculative market. assuming I can own an asset at zero cost (which I know is not true here, but let's assume it), if I don't sell it today, I still have it next week. If fact, it might be worth even more, so holding it can be an advantage. This is usually the case in most markets, homes go up in value over time and have better return than rent. But if demand goes too high, the rent stays the same, but the purchase price rises. Equilibrium occurs when rent and cost of ownership are the same. So, how much a place rents for in a way tells you what it's really worth long term. Which tells us that some markets are in real trouble.

prohornblower

02-10-2007, 03:53 PM

My gf and I rent an apartment. Our rent is about 1/7th our combined NET pay. We are saving for a home. We have saved a lot. I'm 27 and am shooting to own a home outright by 32.

I'd imagine less than 10% of homes are owned outright by their residents. People say they own a home all the time but what they mean is they are making their banker rich, and only slowly building equity.

Freakin

02-10-2007, 04:00 PM

Me and my bank own my house. It's about 50/50 right now.

meep_42

02-10-2007, 04:32 PM

If you own more of your home than the absolute minimum to ensure the lower rate possible on your mortgage, you're leaving money on the table. Owning a home outright is for retirees and suckers, but mostly just suckers.

-d

Freakin

02-10-2007, 04:38 PM

[ QUOTE ]
Owning a home outright is for retirees and suckers, but mostly just suckers.

[/ QUOTE ]

and older chinese dudes

Patrick del Poker Grande

02-10-2007, 04:38 PM

[ QUOTE ]
My gf and I rent an apartment. Our rent is about 1/7th our combined NET pay. We are saving for a home. We have saved a lot. I'm 27 and am shooting to own a home outright by 32.

I'd imagine less than 10% of homes are owned outright by their residents. People say they own a home all the time but what they mean is they are making their banker rich, and only slowly building equity.

[/ QUOTE ]
You're right. I should be paying rent on a townhouse instead of paying just a little more for a mortgage on a 4-br house and gaining equity. I'm such a sucker.

celiboy

02-10-2007, 04:48 PM

[ QUOTE ]
If you own more of your home than the absolute minimum to ensure the lower rate possible on your mortgage, you're leaving money on the table. Owning a home outright is for retirees and suckers, but mostly just suckers.

-d

[/ QUOTE ]

Please elaborate. My home is fully paid for while other suckers have 1000+ mortgages each month. I'm playing about 5K every month into retirement accounts partly because I don't have a mortgage to pay. Keep in mind these are after tax dollars, so to save a grand per month on your mortgage requires 1500 of actual income depending on your marginal tax rate. Now having said that, I'm in Canada and mortgage interest is not tax deductible whereas in the U.S. it is, so in the U.S. having a mortgage versus not would be a closer decision...in Canada it's a no brainer to pay it off ASAP. If you have a mortgage of 5% and pay it off, that is like making a risk free return of 8% after factoring in taxes. Let me guess...all of you ballers will easily get 20% return every year for the rest of your lives....lol....see dot com crash from a few years back for a reality check suckers.

limon

02-10-2007, 05:16 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
i dont spend anything on my home. my renters do. imo your first purchase should be a duplex or better. why pay a mortgage when your neighbor will pay it for you?

[/ QUOTE ]

Where is this limon? This is not close to possible in much of the US.

[/ QUOTE ]

this is in Los Angeles and its no less possible than buying a single family dwelling.

[/ QUOTE ]

I mean possible as in the rent on half a duplex is = to the mortgage. I'm very surprised that can be true in LA, must be out in the burbs? I've always thought this was the way to go but I ran numbers and it said I'd have to live somewhere that I really don't want to live.

[/ QUOTE ]

you wont be cashflow positive day 1. in los angeles it will take 3-5 years. my places are in the foothills outside downtown l.a. i got very lucky in that the prices/rents went throught the roof in the last 3 years.

cbloom

02-10-2007, 05:20 PM

celiboy, you are right. Without the mortgage deduction owning a home is a poor long term investment in most markets. With it, you're better off having a mortgage than paying it off (with the current low interest rates anyway).

prohornblower

02-10-2007, 05:32 PM

[ QUOTE ]
[ QUOTE ]
My gf and I rent an apartment. Our rent is about 1/7th our combined NET pay. We are saving for a home. We have saved a lot. I'm 27 and am shooting to own a home outright by 32.

I'd imagine less than 10% of homes are owned outright by their residents. People say they own a home all the time but what they mean is they are making their banker rich, and only slowly building equity.

[/ QUOTE ]
You're right. I should be paying rent on a townhouse instead of paying just a little more for a mortgage on a 4-br house and gaining equity. I'm such a sucker.

[/ QUOTE ]

What?? When did I say you were wrong? If you are implying I'm a sucker, I'd say In my case, I'm not even married yet and don't even know if I want to live in this city much longer. Buying a home would be really stupid. Plus, we love our apartment.

prohornblower

02-10-2007, 05:40 PM

[ QUOTE ]
celiboy, you are right. Without the mortgage deduction owning a home is a poor long term investment in most markets. With it, you're better off having a mortgage than paying it off (with the current low interest rates anyway).

[/ QUOTE ]

It's a debate between levarage and peace of mind. Some go the leverage route and maybe do better, or get in over their head chasing down high returns. Others like sleeping at night knowing they own shelter for the rest of their life, and now have disposable income to play around with and be more risky.

Freakin

02-10-2007, 05:51 PM

[ QUOTE ]
[ QUOTE ]
celiboy, you are right. Without the mortgage deduction owning a home is a poor long term investment in most markets. With it, you're better off having a mortgage than paying it off (with the current low interest rates anyway).

[/ QUOTE ]

It's a debate between levarage and peace of mind. Some go the leverage route and maybe do better, or get in over their head chasing down high returns. Others like sleeping at night knowing they own shelter for the rest of their life, and now have disposable income to play around with and be more risky.

[/ QUOTE ]

i want to own my home outright for the piece of mind, but the rest of me wants to move every 2 years to the biggest mortgage payment I can afford for the leverage side of things.

I'll probably never own my home outright, and I don't plan on selling my current home when I buy a new one.

guids

02-10-2007, 06:18 PM

I hope to never own a home, a loft maybe, but not a house, right now I pay under 200$ a month in rent, so Ill be staying here as long as I can ride this gravy train.

Shadowrun

02-10-2007, 06:22 PM

[ QUOTE ]
I hope to never own a home, a loft maybe, but not a house, right now I pay under 200$ a month in rent, so Ill be staying here as long as I can ride this gravy train.

[/ QUOTE ]

maybe i missed this but how do you only pay 200?

guids

02-10-2007, 06:30 PM

My uncle owns a four family and rents me out an apartment. Its small, I have a bedroom, and a kitchen, and thats it, but its about 900sqft, with a killer balcolny, the money Id be making off the equity in owning, doesnt compare to the money I make having the cash to invest in other areas.

Freakin

02-10-2007, 06:41 PM

i'm jealous... it would cost $1000-1500 to get a decent 900sf place around here

MrMon

02-10-2007, 06:45 PM

[ QUOTE ]
[ QUOTE ]
I hope to never own a home, a loft maybe, but not a house, right now I pay under 200$ a month in rent, so Ill be staying here as long as I can ride this gravy train.

[/ QUOTE ]

maybe i missed this but how do you only pay 200?

[/ QUOTE ]

Mom and Dad's house?

guids

02-10-2007, 06:47 PM

[ QUOTE ]
i'm jealous... it would cost $1000-1500 to get a decent 900sf place around here

[/ QUOTE ]

Its really small though:

http://img253.imageshack.us/img253/9538/p1010013ed9.jpg

http://img253.imageshack.us/img253/1426/p1010017gq8.jpg

http://img244.imageshack.us/img244/319/p1010014bs8.jpg

and i had to redo the place, paint, new floors etc. I think in a day or two, im going to start a decorate your pad killer-style thread, I need to get some new crap.

Skoob

02-10-2007, 06:56 PM

Got a mortgage on a 3-br rambler, about 50% paid for.

Mortgage (including property tax, insurance, and interest) is about 20% of my monthly income.

Mrs. Skoob used to be the director of the Section 8 housing programs for a local metro county (now she's a full-time mom) and we've both been apartment managers in the past.

General rule of thumb is not to spend more than a third of your gross income on housing.

You might get more stats from the HUD websites.

Prime Time

02-10-2007, 07:01 PM

Howard Treesong

02-10-2007, 07:18 PM

[ QUOTE ]
[ QUOTE ]
i'm jealous... it would cost $1000-1500 to get a decent 900sf place around here

[/ QUOTE ]

Its really small though:

http://img253.imageshack.us/img253/9538/p1010013ed9.jpg

http://img253.imageshack.us/img253/1426/p1010017gq8.jpg

http://img244.imageshack.us/img244/319/p1010014bs8.jpg

and i had to redo the place, paint, new floors etc. I think in a day or two, im going to start a decorate your pad killer-style thread, I need to get some new crap.

[/ QUOTE ]

Clearly no fulltime GF, given the position of the toilet seat.

guids

02-10-2007, 07:20 PM

When you have 3 or 4 of them rotating in and out, it seems like its full time.

Prime Time

02-10-2007, 07:22 PM

[ QUOTE ]
celiboy, you are right. Without the mortgage deduction owning a home is a poor long term investment in most markets. With it, you're better off having a mortgage than paying it off (with the current low interest rates anyway).

[/ QUOTE ]

It's your home 1st, investment 2nd.
Hopefully you buy a house, to raise a family and extract good value by being in a good school system, with out much riffraff., and your kids get the best possible education. You are near good location close to shopping and medical amenities. You are shielded from crime.

Paying off a home free in clear, is the best if you can afford it.
Why? Because you save on interest payments and provides freedom.
Interest goes to the bank, what the bank does not get, you get to keep. Very simple.
Of course, most people cannot afford this option.
So they borrow.

If you choose to be debt free and you have the means to,
you should:

1)get rid of credit card debt 1st. (Highest and not deductible)
2)auto loans
3)college loans (may be deductible)
4)Home debt

Mickey Brausch

02-10-2007, 08:22 PM

It's pwned.

Myrtle

02-10-2007, 10:10 PM

[ QUOTE ]
[ QUOTE ]
A more biased (http://www.marketoracle.co.uk/Article320.html) (but more accurate than most mainstream media, I think) source.

[/ QUOTE ]

that scares me.

[/ QUOTE ]

Yup.....It also scares me.

For those who have not spent the few minutes to read this link, please do.

Thanks to all who have posted, and there are many divergent opinions here, as I expected.

For all of us, our opinion is often largely based upon our personal experiences.

I've been watching both the personal/family debt level and the housing market for the past few years, and have come to my own unscientific/anecdotal conclusions based upon my observations.

I pay attention to these two things because I am in the consumer electronics business, and purchases of the products that I sell are largely dependent upon disposable income.

For most of us in this business, sales are flat at best, and in many sectors they are down. More importantly, profits have shrunk while overhead costs have continued to climb, and the net result is that many can no longer make anything that resembles a reasonable living in today's economy.

Put simply, there are too many vendors, too many retailers and too many support people in the distribution chain, and they are dropping out because the shrinking profits in the industry cannot support them.

Last week, the Boston Globe reported that in 2006 there were a record number of foreclosures in Massachusetts (as another poster pointed out earlier in this thread).

That got me to thinking about the overall “Big Picture” and what is likely to come, given the economy here in the northeast.

One of the things I wondered about is how many of us own our own homes…..outright. I make that distinction because it seems to me to be one of importance, and here’s why.

The large majority of people that I know are highly leveraged, debt wise. Many of them make what is considered “good money”, bud that doesn’t matter if they are debt leveraged. In a discussion with one of my friends the other day, I wondered out loud about how many folks we knew who actually owned their own homes outright, given that so many of us are a few paychecks from being upside down, mortgage wise.

We discussed it for a while and came up with a WAG that no more than 15%-20% of families in the USA actually own their own homes outright. OK, so what (if anything) does this mean?

We talked for a while about the difference between having to earmark a percentage of your earnings to pay rent or a mortgage, and how that affects us.

One of our idle speculations was a philosophical one……Are those of us in that position (80%-85% if our WAG was close) the modern day version of the Middle Ages serfs?

So that’s where I am at the moment…..pondering that question.

I am not an economist nor do I pretend to have any significant understanding of sophisticated theories of economics.

I’m just looking for clues.

gusmahler

02-10-2007, 10:17 PM

[ QUOTE ]
You're right. I should be paying rent on a townhouse instead of paying just a little more for a mortgage on a 4-br house and gaining equity. I'm such a sucker.

[/ QUOTE ]

As MrMon said, it's market dependent. If you're in an area where rents are substantially less than a mortgage, it could make sense to rent.

I currently rent a house for $2k/month. But houses in this market sell for about $750k. That's $4400 per month at current interest rates (30-year mortgage). And that doesn't include PMI or property taxes. With those, I'd be paying well over $5k/month. Makes much more sense to rent for $2k instead.

And you're only building equity if the house is appreciating (in the first few years, where the majority of payments go to interest), which it might not be doing if we really are living in a bubble.

Where I used to live (Phoenix), renting was about $1200/month and a mortgage was $1700/month. Makes sense to own there because the difference is made up for by the interest deduction.

mmbt0ne

02-10-2007, 10:18 PM

Myrtle,

I can't imagine the banks would chose to do something that would result in them getting a ton of property, but also VASTLY reduce the worth of that property. Also, if the economy goes to ish there won't be anyone to buy all that property, even at the lower prices.

'Chair

02-10-2007, 10:20 PM

the whole idea of "owning a home outright is dumb" is driven by the logic that you will be paying with "cheaper dollars" (think inflation) towards the end of the loan term on a long term loan (plus the interest write off).

from my minimal research, there is way more to factor in than this.

Myrtle

02-10-2007, 10:36 PM

[ QUOTE ]
Myrtle,

I can't imagine the banks would chose to do something that would result in them getting a ton of property, but also VASTLY reduce the worth of that property. Also, if the economy goes to ish there won't be anyone to buy all that property, even at the lower prices.

[/ QUOTE ]

...nor can I, but as I said, I do not pretend to understand economics at that level.

I do know that banks are in business to lend (sell) money for a profit, and that they do not do this in a vacuum......They compete with other banks to 'make the sale'.

It is not unusual, in such an environment, for people to 'chase the sale' without thinking through the full implication of 'making the sale'.

It seems to me that since the 80's we have been in a feverish rate to 'grow'. Mergers, acquisitions...bigger is better.

I wonder if that could possibly explain why banks would do such things?

cbloom

02-10-2007, 11:01 PM

I think the signs are very strong that the US economy is headed for big trouble (at least an extended recession or "stagflation" period). But that's another thread/forum ...

Ray Zee

02-10-2007, 11:22 PM

ive always mostly owned my own home. they have gone up and down with the economy. and the smart people told me it was better to rent than buy. i have kept upgrading to better homnes over the years from my original 30 thousand dollar house and now live in a place worth mega millions all free and clear. you can say i would have done better investing in stocks, maybe so.
yet i have peace of mind, answer to no landlord and do what i want with my property.
suit yourself, everyone has their own opinion.

SossMan

02-11-2007, 02:14 AM

[ QUOTE ]

[ QUOTE ]
If I bought the place I live my mortgage payment would be like 3X the rent.

[/ QUOTE ]

? I don't see how this could possibly be true. Are you talking about the rent from 1 apt and the mortgage for the whole building?

[/ QUOTE ]

it's called rent control and housing appreciation..

that or maybe the op has really bad credit.

SossMan

02-11-2007, 02:52 AM

so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

Myrtle

02-11-2007, 08:30 AM

[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Soss,

The reason I started this thread was to attempt to get some clarity on the subject.

If you feel that you have something of value to add, please take the time to do so.

scotchnrocks

02-11-2007, 09:25 AM

[ QUOTE ]

The large majority of people that I know are highly leveraged, debt wise. Many of them make what is considered “good money”, bud that doesn’t matter if they are debt leveraged. In a discussion with one of my friends the other day, I wondered out loud about how many folks we knew who actually owned their own homes outright, given that so many of us are a few paychecks from being upside down, mortgage wise.

[/ QUOTE ]

it's not so bad if you have a bit of equity in the house...in my case, if i were to lose my job i could tap up to ~$40k in equity

[ QUOTE ]

One of our idle speculations was a philosophical one……Are those of us in that position (80%-85% if our WAG was close) the modern day version of the Middle Ages serfs?

[/ QUOTE ]

after x years, you own the house free and clear...the whole time you're paying for it, you are building equity if you're using a fixed loan, plus you can sell at any time

fact is, in the middle class or lower, you work to live and live to work

Mickey Brausch

02-11-2007, 09:33 AM

[ QUOTE ]

The reason I started this thread was to attempt to get some clarity on the subject.

[/ QUOTE ]Here's something that I just remembered. I recently saw a TV documentary about a musician (who incidentally happened to be the best player in modern times of his chosen instrument), a truly world class artist, and buried amongst his many phrases in that interview was something that I found to be extremely profound and significant. Though I'm sure many people will see little to it:

"Y'know, for most of my life I struggled very hard to remain poor."

SossMan

02-12-2007, 11:48 AM

[ QUOTE ]
[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Soss,

The reason I started this thread was to attempt to get some clarity on the subject.

If you feel that you have something of value to add, please take the time to do so.

[/ QUOTE ]

i can respect the response, but seriously imagine trying to answer questions or give suggestions to a bunch of realtors about their very general poker advice. the answer to so many of these questions is the same answer to so many poker questions...it depends.
Most everyone has a unique situation that would require a bit of analysis (personal and financial) to generate good advice. Without that, it would be like me saying...play tight aggressive and don't fold AA preflop.

Kneel B4 Zod

02-12-2007, 12:17 PM

as others have said, rent vs buy is not a simple question to answer.

it depends greatly on the prices in your specific market, your timeframe, family situation, etc.

too many people simply think that buying is better than renting b/c rent is money out the window. well guess what - so are the interest payments that make up a huge portion of monthly mortgage payment.

too many people also assume that houses are some awesome investment. since the mid 1960's, houses have appreciated (iirc) on average 1-2% over inflation. both equities and even low risk bonds have appreciated much faster. the point, there are probably better investments you can make (ie better places to put your money) than a house.

re: the question of it being bad to own your home, it depends. not all debt is bad debt, and using others peoples money can be a sound strategy. if you can get a higher return in alternative investments than the interest rate you are paying on your mortgage, you should probably consider those investments instead of paying your mortgage faster. if not, pay your mortgage faster.

as for me, I'm renting. the ownership market in Boston is still falling (quickly) from 2 years ago, and I think it will continue to.

Dominic

02-12-2007, 12:35 PM

[ QUOTE ]
I'm on an interest only mortgage so, um, no.

[/ QUOTE ]

lol...me too.

natedogg

02-12-2007, 01:23 PM

[ QUOTE ]
ortgage payment.

too many people also assume that houses are some awesome investment. since the mid 1960's, houses have appreciated (iirc) on average 1-2% over inflation. both equities and even low risk bonds have appreciated much faster. the point, there are probably better investments you can make (ie better places to put your money) than a house.

[/ QUOTE ]

They key difference here is that no one will lend you money to buy stocks the way they will lend you money to buy a house.

To acquire and benefit from the growth of 500k worth of stock, you generally need 500K. To acquire and benefit from the increase in value on a 500K home you generally need about 25k give or take. It is such a significantly improved opportunity for your money that unless you have strong reasons to believe that your local market is ridiculously overheated, you should buy a house. Period.

Some markets are dangerous (like Las Vegas two years ago) and even then, buying a primary residence that you can afford is still a no brainer if you plan to hold onto it for 10 years.

Also, your worst case scenario with 500k worth of stock is pretty grim. Your worst case scenario with a house is you walk away with a bad credit rating for a while. You have almost no financial risk buying a house, and you have way way more upside than you could get putting your down payment into stocks.

natedogg

Kneel B4 Zod

02-12-2007, 01:36 PM

[ QUOTE ]
Also, your worst case scenario with 500k worth of stock is pretty grim. Your worst case scenario with a house is you walk away with a bad credit rating for a while. You have almost no financial risk buying a house, and you have way way more upside than you could get putting your down payment into stocks.

[/ QUOTE ]

this simple isn't true. I'm not talking about buying $25k worth of Walmart vs. putting that money into a down payment. also, you really just need to consider the alternative places your money can go.

I'm talking about a sound, balanced investment strategy that history has shown to return between 5% and 10%. history has shown that investing in a house is a marginally profitable investment. the upside (in historical EV, not in terms of wild speculation) is vastly greater in equities than in home ownership.

while you are correct about the debt availability wrt to buying a house, you also need to consider the huge difference in liquidity. if you want to dump walmart stock you pick up your phone and you're done with it. if you need to dump your house for any reason tomorrow, you are probably going to lose a lot of money.

mostly, I'm saying that too many people don't consider the lost money that is represented by interest payments, but everyone seems to consider rent as lost money.

natedogg

02-12-2007, 01:48 PM

[ QUOTE ]
[ QUOTE ]
Also, your worst case scenario with 500k worth of stock is pretty grim. Your worst case scenario with a house is you walk away with a bad credit rating for a while. You have almost no financial risk buying a house, and you have way way more upside than you could get putting your down payment into stocks.

[/ QUOTE ]

this simple isn't true. I'm not talking about buying $25k worth of Walmart vs. putting that money into a down payment. also, you really just need to consider the alternative places your money can go.

I'm talking about a sound, balanced investment strategy that history has shown to return between 5% and 10%. history has shown that investing in a house is a marginally profitable investment. the upside (in historical EV, not in terms of wild speculation) is vastly greater in equities than in home ownership.

while you are correct about the debt availability wrt to buying a house, you also need to consider the huge difference in liquidity. if you want to dump walmart stock you pick up your phone and you're done with it. if you need to dump your house for any reason tomorrow, you are probably going to lose a lot of money.

mostly, I'm saying that too many people don't consider the lost money that is represented by interest payments, but everyone seems to consider rent as lost money.

[/ QUOTE ]

I don't think the liquidity issue outweighs the benefits you get from being able to leverage your money 10 or 20 times when buying a house.

And you can also get a line of credit pretty rapidly. I've never had a need nor have I ever known anyone with the need to have 25K available overnight.

The key is the debt you can leverage to get into your house and it's fairly safe debt.

Your mileage may vary of course but this is what I've seen.

natedogg

SomethingClever

02-12-2007, 01:48 PM

I own a place in Portland, Oregon, home of the famous Urban Growth Boundary.

We're in a great location, near an awesome park on the site of an extinct volcano, yet 10 minutes from downtown.

My wife and I are planning on going travelling at the end of the year, though, so we need to figure out whether to sell or rent. If we could find good tenants, we would probably rent, as we would like to stay in the home a few more years.

I've been meaning to make a house brag post but my copy of Photoshop is weirdly hosed and freezes every time I try to resize an image. I'll get it fixed and post one soon.

Kneel B4 Zod

02-12-2007, 02:11 PM

[ QUOTE ]
The key is the debt you can leverage to get into your house and it's fairly safe debt.

[/ QUOTE ]

you're not thinking about this completely though.

you need to compare return on capital (ie how much money you put down), not return on assets (including your leverage), b/c leverage magnifies BOTH the return and risk.

So, the opportunity cost is calculated from the down payment, not the home price.

Kneel B4 Zod

02-12-2007, 02:51 PM

[ QUOTE ]
I currently rent, although we will buy a house shortly (w/in 90 days). I haven't decided how much of it we will own, but it's safe to say that it will be 75% or north.

[/ QUOTE ]

Howard,
If you are talking about putting 75% down, this is almost certainly a gigantic mistake, as I've alluded to above. Your money will be much better off in other investments - you shouldn't be putting nearly this much down.

natedogg

02-12-2007, 03:08 PM

[ QUOTE ]
[ QUOTE ]
The key is the debt you can leverage to get into your house and it's fairly safe debt.

[/ QUOTE ]

you're not thinking about this completely though.

you need to compare return on capital (ie how much money you put down), not return on assets (including your leverage), b/c leverage magnifies BOTH the return and risk.

So, the opportunity cost is calculated from the down payment, not the home price.

[/ QUOTE ]

But isn't it true that with the down, you can earn the gains on a much bigger asset than you would otherwise be able to earn?

Say, 25K and a 500K house. With 25K you reap the gains on a 500K asset, but if you put it into stocks you can only reap the gains on a 25k asset. That is a huge difference.

Assuming a long term investment, which it should be, the returns cannot compare can they?

Assume that the stock returns are a few percent higher than the real estate returns, let's say 10% vs. 6%.

6% return on 500k over the years amounts to far more than 10% on 25K. ?? Am I confused?

And of course, your return is actually higher on the house after you compare taxes. The cap gains on the 25K of stock will be 15%, while the cap gains on the house will be nothing for the first 500k of profit if you sell.

I could easily be confused so please clarify if I'm seeing it wrong.

natedogg

chopstick

02-12-2007, 04:34 PM

[ QUOTE ]
To acquire and benefit from the growth of 500k worth of stock, you generally need 500K. To acquire and benefit from the increase in value on a 500K home you generally need about 25k give or take. It is such a significantly improved opportunity for your money that unless you have strong reasons to believe that your local market is ridiculously overheated, you should buy a house. Period.

[/ QUOTE ]

"Period."?

I always get a great deal of amusement from ignorance-fueled righteousness.

You are the absolute dream customer for a mortgage broker or a realtor. You are so convinced of the rightness of your position, to the point where you are going to try to convince others that there isn't much reason in considering other ideas.

The amusing part is that your steadfastness is only matched by your ignorance.

Instead of wrapping yourself up in realtor marketing garbage, stop and consider what some of these posters are explaining. Better yet, get out there and do some research of your own. Learn what the historical residential real estate ROI is. Learn about how leverage works both ways. Learn about the concept of ARMs, how many of them have flooded the market in the last few years, and what the impact to the overall housing market from the resets will be. Learn about broad-based capital asset investment theory.

But please stop trumpeting real estate marketing garbage such as "leverage is good!". Leverage is a tool. It isn't good or bad, and it does not automatically a good investment make. Leverage can hurt you just as badly as it can help you. I know many people who are "under" on their mortgages right now because they thought exactly the way that you do.

Sorry to bash you around a bit, but it's really frustrating to continue to see this mentality everywhere. The financial services industries love it, that's for certain.

gusmahler

02-12-2007, 04:54 PM

[ QUOTE ]
Say, 25K and a 500K house. With 25K you reap the gains on a 500K asset, but if you put it into stocks you can only reap the gains on a 25k asset. That is a huge difference.

Assuming a long term investment, which it should be, the returns cannot compare can they?

Assume that the stock returns are a few percent higher than the real estate returns, let's say 10% vs. 6%.

6% return on 500k over the years amounts to far more than 10% on 25K. ?? Am I confused?

[/ QUOTE ]

I believe he's assuming that you invest the difference between renting and buying in the stock market.

In your example, you're paying about $2800/month on a mortgage. If rent is half as much as buying, you'd invest the difference ($1400/month) in the stock market.

According to http://www.mortgage-calc.com/mortgage/rentvsbuy.php, the house will be worth $2.9M at the end of 30 years and you will have saved $148k in taxes on interest payments of $528k. (assuming 5.8% interest and 6% inflation)

According to http://www.ici.org/cgi-bin/calcs/SAV14.cgi/investment_company_institute
if you start with $25k and invest $1400 per month at 10%, at the end of 30 years, you have $3.6M

Is the comparison this simple? Of course not. You might not be able to rent the same house for 30 years. Plus, as the house appreciates, the rent will go up. (E.g., the rent on a $500k house is less than the rent on a $2.9M house).

natedogg

02-12-2007, 05:26 PM

[ QUOTE ]
[ QUOTE ]
To acquire and benefit from the growth of 500k worth of stock, you generally need 500K. To acquire and benefit from the increase in value on a 500K home you generally need about 25k give or take. It is such a significantly improved opportunity for your money that unless you have strong reasons to believe that your local market is ridiculously overheated, you should buy a house. Period.

[/ QUOTE ]

"Period."?

I always get a great deal of amusement from ignorance-fueled righteousness.

You are the absolute dream customer for a mortgage broker or a realtor. You are so convinced of the rightness of your position, to the point where you are going to try to convince others that there isn't much reason in considering other ideas.

The amusing part is that your steadfastness is only matched by your ignorance.

Instead of wrapping yourself up in realtor marketing garbage, stop and consider what some of these posters are explaining. Better yet, get out there and do some research of your own. Learn what the historical residential real estate ROI is. Learn about how leverage works both ways. Learn about the concept of ARMs, how many of them have flooded the market in the last few years, and what the impact to the overall housing market from the resets will be. Learn about broad-based capital asset investment theory.

But please stop trumpeting real estate marketing garbage such as "leverage is good!". Leverage is a tool. It isn't good or bad, and it does not automatically a good investment make. Leverage can hurt you just as badly as it can help you. I know many people who are "under" on their mortgages right now because they thought exactly the way that you do.

Sorry to bash you around a bit, but it's really frustrating to continue to see this mentality everywhere. The financial services industries love it, that's for certain.

[/ QUOTE ]

You are right and I didn't mean to come off like that. I am in no way claiming you shouldn't diversify if you have assets to diversify. I also didn't mean to say that there is always no better choice than buying a home, but it's definitely hard to find a better one in most cases.

But you do recognize there is a significant difference between investing in your primary residence and simply investing in real estate right? I'm not by any means saying one should only invest in real estate.

Yes, leverage works both ways but it only hurts you with your home if you have to dump it for some reason. Otherwise the long run comes out for you. You could be in the negative and you still will see huge growth compared to your investment.

If it's your primary residence it's really hard to beat the investment opportunity of a house. Not to mention what I've said before about the tax situation with cap gains on a primary residence vs. other vehicles.

[ QUOTE ]
I know many people who are "under" on their mortgages right now because they thought exactly the way that you do.

[/ QUOTE ]

As long as they don't sell now they are in no danger. You agree with that much don't you? Sure if they leveraged themselves beyond their ability to maintain the mortgage that was stupid but that's not what I'm saying anyone should do.

Edit: by the way i really did not mean to sound like areal estate shill. I'm not involved in real estate in any way, or any kind of investment/finance for that matter. I'm just a talking from my own experience and observation.

natedogg

natedogg

02-12-2007, 05:30 PM

[ QUOTE ]
[ QUOTE ]
Say, 25K and a 500K house. With 25K you reap the gains on a 500K asset, but if you put it into stocks you can only reap the gains on a 25k asset. That is a huge difference.

Assuming a long term investment, which it should be, the returns cannot compare can they?

Assume that the stock returns are a few percent higher than the real estate returns, let's say 10% vs. 6%.

6% return on 500k over the years amounts to far more than 10% on 25K. ?? Am I confused?

[/ QUOTE ]

I believe he's assuming that you invest the difference between renting and buying in the stock market.

In your example, you're paying about $2800/month on a mortgage. If rent is half as much as buying, you'd invest the difference ($1400/month) in the stock market.

According to http://www.mortgage-calc.com/mortgage/rentvsbuy.php, the house will be worth $2.9M at the end of 30 years and you will have saved $148k in taxes on interest payments of $528k. (assuming 5.8% interest and 6% inflation)

According to http://www.ici.org/cgi-bin/calcs/SAV14.cgi/investment_company_institute
if you start with $25k and invest $1400 per month at 10%, at the end of 30 years, you have $3.6M

Is the comparison this simple? Of course not. You might not be able to rent the same house for 30 years. Plus, as the house appreciates, the rent will go up. (E.g., the rent on a $500k house is less than the rent on a $2.9M house).

[/ QUOTE ]

If the difference between renting and buying is that high then yes, you should probably not buy a house at that time.

And of course, even then the rent won't stay a steady 1400 less than the mortgage, it will raise and probably pass the cost of your initial mortgage.

And the cap gains on your sales are a huge factor not to overlook.

You're right it's not totally simple and in some cases it may be better to put that 25k in the market, but dammit, you're being subsidized to take on debt that you can put to work for you. That is really hard to beat.

I'm not saying I'm absolutely right. I've even asked for clarifications if I'm confused but I don't see yet how it's better to put my down payment into the stock market rather than buy a house.

natedogg

bobman0330

02-12-2007, 05:37 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
The key is the debt you can leverage to get into your house and it's fairly safe debt.

[/ QUOTE ]

you're not thinking about this completely though.

you need to compare return on capital (ie how much money you put down), not return on assets (including your leverage), b/c leverage magnifies BOTH the return and risk.

So, the opportunity cost is calculated from the down payment, not the home price.

[/ QUOTE ]

But isn't it true that with the down, you can earn the gains on a much bigger asset than you would otherwise be able to earn?

Say, 25K and a 500K house. With 25K you reap the gains on a 500K asset, but if you put it into stocks you can only reap the gains on a 25k asset. That is a huge difference.

Assuming a long term investment, which it should be, the returns cannot compare can they?

Assume that the stock returns are a few percent higher than the real estate returns, let's say 10% vs. 6%.

6% return on 500k over the years amounts to far more than 10% on 25K. ?? Am I confused?

And of course, your return is actually higher on the house after you compare taxes. The cap gains on the 25K of stock will be 15%, while the cap gains on the house will be nothing for the first 500k of profit if you sell.

I could easily be confused so please clarify if I'm seeing it wrong.

natedogg

[/ QUOTE ]

I don't see where you've subtracted out mortgage interest, which makes a big difference.

Kneel B4 Zod

02-12-2007, 05:38 PM

[ QUOTE ]
I've even asked for clarifications if I'm confused but I don't see yet how it's better to put my down payment into the stock market rather than buy a house.

[/ QUOTE ]

Nate - it depends. but that's a basic point that many people miss, by just assuming that owning > renting. the answer is different for all kinds of people and situations.

I have a spreadsheet with some basic scenarios worked out that I will try to post here later on tonight.

chopstick

02-12-2007, 06:22 PM

[ QUOTE ]

Say, 25K and a 500K house. With 25K you reap the gains on a 500K asset, but if you put it into stocks you can only reap the gains on a 25k asset. That is a huge difference.

[/ QUOTE ]

With 25K in stocks, the most you can lose is 25K
With 25K in a 500K house, you can lose far, far more. Even if your house dips in value 10%, you have just lost your original 25K, AND an additional 25K on top of that.

THAT is a huge difference.

Think it's unlikely (http://money.cnn.com/2007/02/06/real_estate/exurbs_housing.reut/?postversion=2007020709)?

Besides - are you only going to make that 25K downpayment on your house, and then not make any monthly mortgage payments? It's going to cost you more than that 25K, and you don't have a choice about making that monthly payment each month, unless you sell. With your 25K of stocks, you aren't making monthly payments. If you want to make a fair investment comparison, then pick the total amount of time that you plan to keep the investment, and use the same amount of money you'd spend on each.

Here's an example, using your numbers.

25K in stocks vs 25k down for a 500k house.

We'll start with the house to get the real numbers for the stock.

Since you are only putting down 25K, you are almost certainly going to use an ARM, as you don't meet the 20/80 rules - you are only putting down 5% of the value.

We'll say since you are using an ARM and don't want to get destroyed by a rate change, you plan to sell the house/stocks un 5 years, right before your rate adjusts.

Let's use a calculator:
http://www.dinkytown.net/java/MortgageAdjustable.html

A 475K mortgage at the 5.5% rate means a monthly payment of $2,697. Over 60 months, that is $161820 in mortgage payments, of which the highest principal paid in a month is $680 in month 60. Overall you are paying about $2050 a month in interest alone during this time, or $123,000.

So where are you at after 60 months?

You've paid $25k down on the principal initially, plus about another $40k in principal payments. You've got about $65K equity in this point. Assuming the house appreciated at 4.67% (assuming inflation rate of 3.43 (http://inflationdata.com/inflation/inflation_rate/AnnualInflation.asp)%, and using Schiller's 1.24% real rate) ... heck, let's round it up to 5% for you to make the numbers easier - It's now 5 years later and your house is now worth $638k, for a paper gain of $138k. If you sell the house to get your money out, you'll pay a 6% commission on the sale, which means the money in your pocket is $600k. You take that and pay off the remaining $410k in principal, probably with a $10k prepayment fee, which means you now have $180k in your pocket. $65k of that $180k was money that you put in, so it looks like your gain is about $115k, TAX FREE!

That seems pretty awesome!

But wait. What about the interest you paid? How much was that, again? $123k? Well, you wrote it off on your taxes at least, so let's lop off 28%, assuming you are a balla and make between 74-154k (http://www.irs.gov/formspubs/article/0,,id=150856,00.html). Still looking at 89k in payments, unfortunately.

Well, I guess that's at least a nice $26k you made that you didn't have to pay taxes on. And it only took a $65k investment over 5 years to do it! I wonder what would have happened if you had invested in stocks, instead.

Let's take a look. We'll assume a 7% annual ROI, a 25K initial investment, and an annual $32.4k (monthly $2,697) contribution. Calculators (http://www.ici.org/cgi-bin/calcs/SAV14.cgi/investment_company_institute) are a wonderful thing.

You will have $228,365 at the end of the time period.
228k - 65k (the amount you put in) is $163k. You'll take a 15% long term capital gains hit on that, bringing you to $139k

So, $139k on a (25k + (2.7k per month)) over five years investment, or $26k for the exact same thing?

[ QUOTE ]

Assuming a long term investment, which it should be, the returns cannot compare can they?

Assume that the stock returns are a few percent higher than the real estate returns, let's say 10% vs. 6%.

6% return on 500k over the years amounts to far more than 10% on 25K. ?? Am I confused?

[/ QUOTE ]

Yes, you are confused. Adjust for inflation, then come back and tell us your new numbers.

http://www.themoneyblogs.com/InvestingIn...since-1890.html (http://www.themoneyblogs.com/InvestingIntelligently/my.blog/historical-housing-prices-since-1890.html)

Since 1950, a 1.24% real return? vs the approximate 7% for houses?

You realize that you don't have to pay annual property taxes on stocks, right? That stocks don't have windows to fix, or walls to paint? No HOA fees to pay?

[ QUOTE ]

And of course, your return is actually higher on the house after you compare taxes. The cap gains on the 25K of stock will be 15%, while the cap gains on the house will be nothing for the first 500k of profit if you sell.

[/ QUOTE ]

It's 250K, not 500K. It only goes to 500K if you are married.

[ QUOTE ]

I could easily be confused so please clarify if I'm seeing it wrong.

[/ QUOTE ]

Indeed.

I took a lot of shortcuts and ignored a lot of things with the above analysis, but I'm comfortable enough with it to use it as a ballpark.

I think most people just don't understand the impact of front-loaded interest payments on loans.

Hopefully this was of value to someone.

I'd appreciate it if anyone can correct anything I screwed up (assuming the screwup is of significance to the point that my numbers would otherwise be grossly misleading - please avoid nittery). I always enjoy learning.

Nate - I'm not trying to be a jerk here, hopefully you can see that by the time I spent writing this stuff out. Hopefully someone else has done a fixed 30 example while I've been typing this up.

Kneel B4 Zod

02-12-2007, 06:34 PM

[ QUOTE ]
I think most people just don't understand the impact of front-loaded interest payments on loans.

[/ QUOTE ]

yes.

also, I think that was a great post. I mean there are a lot of factors here, a lot of which you laid out, that most people don't ever consider, or realize they need to consider.

the flip side is that some other people don't understand the benefit of leverage, and that paying 80% down for a house is probably a bad idea. the 'extra' money above 20% or 30% or whatever can probably be better invested than in your house.

I have a friend who did very well as a commodities trader, and paid $1m cash for his house, b/c he didn't want to be in debt. his bad.

chopstick

02-12-2007, 06:39 PM

[ QUOTE ]
You are right and I didn't mean to come off like that. I am in no way claiming you shouldn't diversify if you have assets to diversify. I also didn't mean to say that there is always no better choice than buying a home, but it's definitely hard to find a better one in most cases.

[/ QUOTE ]

No, it isn't.

[ QUOTE ]

But you do recognize there is a significant difference between investing in your primary residence and simply investing in real estate right? I'm not by any means saying one should only invest in real estate.

[/ QUOTE ]

I don't view the place I happen to live in as an investment, just because I decided to buy it instead of renting it. I think we probably have a fundamental difference of viewpoint here. Because housing historically appreciates just at or just barely beyond the rate of inflation, I don't view it as an investment, regardless of the paper value change. It's a nice hedge against inflation, historically, but that doesn't make it the same thing as a investment asset.

[ QUOTE ]

Yes, leverage works both ways but it only hurts you with your home if you have to dump it for some reason. Otherwise the long run comes out for you. You could be in the negative and you still will see huge growth compared to your investment.

[/ QUOTE ]

Let's say you lose your job or something happens where you just need money and have to liquidate assets to get it. In the case of stocks, you just sell them and possibly take a short term cap gains hit. That's it. In the case of a house, due to the difference in asset liquidity, you have a much more difficult time turning it into cash, and when you do, you now need to find a new place to live.

Let's say you find a new job and need to move.

Let's say you bought with an ARM, the rates adjust, and your mortgage payment jumps 50% and you can't afford it and HAVE to sell.

You realize that when the interest rate adjusts and starts to go up, you start losing money via higher monthly interest % payments, right?

Or, let's say that you have a good job and will always be able to make the mortgage payment, even with adjustments. If the value of your house drops and it takes years before you start showing any kind of real appreciation on the market value, you have lost the compounding effect that you otherwise would have leveraged with a different asset.

There's more but I'm getting tired of typing.

[ QUOTE ]

If it's your primary residence it's really hard to beat the investment opportunity of a house. Not to mention what I've said before about the tax situation with cap gains on a primary residence vs. other vehicles.

[/ QUOTE ]

No.

[ QUOTE ]
[ QUOTE ]
I know many people who are "under" on their mortgages right now because they thought exactly the way that you do.

[/ QUOTE ]

As long as they don't sell now they are in no danger. You agree with that much don't you? Sure if they leveraged themselves beyond their ability to maintain the mortgage that was stupid but that's not what I'm saying anyone should do.

[/ QUOTE ]

They are in danger, because they used ARMs. They may be FORCED to sell, or worse, foreclose, because of the change in interest rates.

Your example of 25K for a 500K house basically requires an ARM, as you aren't putting down 20% of the value in a downpayment. You can run an 80/20, but that's still going to have issues.

gusmahler

02-12-2007, 07:05 PM

[ QUOTE ]
I'd appreciate it if anyone can correct anything I screwed up (assuming the screwup is of significance to the point that my numbers would otherwise be grossly misleading - please avoid nittery). I always enjoy learning.

[/ QUOTE ]

The comparison is not fair. You're comparing $2700/month into the stock market versus $2700/month to a mortgage. That's not the choice facing people, because they need a house (or apartment).

The true comparison is $2700 for mortgage versus $2700 for rent+stock market. So if the rent is $1500, you're putting $1200 in the stock market.

There are other differences also (e.g., home repairs and property taxes), but I think the difference in investment amount is much more significant.

You also miscalculated the amount you put in. The correct amount is $25k + ($32.4k * 5) = $187k.

Putting the numbers I just mentioned in ($25k down + $1200/month), you have $120k at the end of 5 years. You've put in $97k. So the gain is $23k. Subtract 15% capital gains and you have $19,555

natedogg

02-12-2007, 07:21 PM

I appreciate your responses, I'm not taking offense at all at being contradicted. I will digest your analysis when I have time and get back with your questions.

natedogg

natedogg

02-12-2007, 07:29 PM

[ QUOTE ]
The true comparison is $2700 for mortgage versus $2700 for rent+stock market. So if the rent is $1500, you're putting $1200 in the stock market.

[/ QUOTE ]

But to be sure, this is wrong as well right? Your monthly rent will increase over the 30 years whereas your mortgage will not. Where I live, I have owned a house for 6 years and rents for comparable homes are already higher than my mortgage.

If two people with the same monthly housing budget each try one of these strategies, won't the person who bought a house eventually pass up the renter in terms of free cash to spend per month on stocks? (assuming similar costs, incomes, etc).

This certainly must be part of the calculation when comparing rents + stocks vs. mortgage if you're going to chart it over time.

No?

natedogg

LearnedfromTV

02-12-2007, 07:41 PM

[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Do realtor message boards exist? Public unbiased resources with quality information?

//

My wife and I rent now fairly cheap (both for the quality of the place and for our income, decent 3-room apartment in Chicago, <10%). We'll be buying a much larger place soon. Very little chance we put down less than 20-25%; screw extra leverage, I hate debt.

gusmahler

02-12-2007, 08:10 PM

[ QUOTE ]
[ QUOTE ]
The true comparison is $2700 for mortgage versus $2700 for rent+stock market. So if the rent is $1500, you're putting $1200 in the stock market.

[/ QUOTE ]

But to be sure, this is wrong as well right? Your monthly rent will increase over the 30 years whereas your mortgage will not. Where I live, I have owned a house for 6 years and rents for comparable homes are already higher than my mortgage.

[/ QUOTE ]

You're right. The calculation I put in is true for short term (1-5 years), but over 30 years, things change. Then again, who stays in their homes for 30 years nowadays?

SossMan

02-12-2007, 08:16 PM

[ QUOTE ]
[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Do realtor message boards exist? Public unbiased resources with quality information?

//

My wife and I rent now fairly cheap (both for the quality of the place and for our income, decent 3-room apartment in Chicago, <10%). We'll be buying a much larger place soon. Very little chance we put down less than 20-25%; screw extra leverage, I hate debt.

[/ QUOTE ]

I don't know of any public ones, but there is a mortgage broker forum that's pretty popular.

Some pretty scummy people on there, though, as you might imagine.

Paluka

02-12-2007, 08:33 PM

Some of you might find this link useful:

http://www.housemath.us/

LearnedfromTV

02-12-2007, 08:34 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Soss,

The reason I started this thread was to attempt to get some clarity on the subject.

If you feel that you have something of value to add, please take the time to do so.

[/ QUOTE ]

i can respect the response, but seriously imagine trying to answer questions or give suggestions to a bunch of realtors about their very general poker advice. the answer to so many of these questions is the same answer to so many poker questions...it depends.
Most everyone has a unique situation that would require a bit of analysis (personal and financial) to generate good advice. Without that, it would be like me saying...play tight aggressive and don't fold AA preflop.

[/ QUOTE ]

Ignorance of the nuances of real estate investment are a concern with either issue, but there is a difference between

- analyzing an individual decision
- analyzing the global state of consumer debt in America, particularly home debt.

OP was interested in the latter, and although we've mostly only gotten anecdotal evidence in this thread, it is good thing that the issue has been raised, even if no one leaves this thread with answers to the difficult questions.

Whether I understand the nuances of most Americans' personal situations, if a large percentage of them live in "purchased" homes of which they actually own a small percentage, even I can see that this is a window into a broader economic problem.

Between home debt and credit card debt, Americans spend a ridiculous percentage of their future incomes to satisfy current needs/wants. Whether individuals exist whose situation allows them to/indicates that they should put 20K down for a $600K place, or pay interest-only for years, a housing market full of these people cannot be a good thing, especially because we don't know how America's role in the world economy will change in our lifetime. If you are 25 and buying a place that you expect to finally pay for when you are 55 (or you expect whoever you flip it to will pay for it in thirty years), you should think a little closer about how sure you are about your ability to earn enough in thirty years to pay for it and everything else you've bought in between. I'm not talking about a standard thirty-year mortgage that you finally finish paying in thirty years, while paying a sufficiently small % of your monthly income and saving for retirement, etc; i'm talking about methods to delay and delay and delay, so that you can spend and spend and spend, ignore saving for retirement, all while (apparently) counting on income from ages 50-65 to finally pay for the house.

Credit is not a free pass. At some point, someone pays the bill. And if the economy is full of people who can't, the rest of us will end up bearing part of the burden, through higher taxes, a weaker economy, lower home values, etc. We aren't even discussing the economic disaster that 60-70 year olds with no retirement savings might be in thirty years while SS crumbles.

I'm not smart enough to analyze the details of this problem, and I haven't studied enough economics to state any meaningful conclusions, but anyone with a little common sense can see that it is a problem (or at least, *if*, say X% of Americans own <30% of their home, and the remainder owed is Y% of their expected future income, for large enough values of X and Y, we have a serious problem, especially given general saving/spending/debt habits of the average American).

SomethingClever

02-12-2007, 08:45 PM

[ QUOTE ]
Some of you might find this link useful:

http://www.housemath.us/

[/ QUOTE ]

That's interesting, but I was under the impression that you didn't have to pay capital gains if you live in a home for more than 2 years (up to gains of $500,000 or something).

SomethingClever

02-12-2007, 08:55 PM

Here's a thread I started in the finanace forum last May about my housing situation.

link (http://forumserver.twoplustwo.com/showflat.php?Cat=0&Board=stocks&Number=5825532&Sea rchpage=1&Main=5825532&Words=+SomethingClever&topi c=&Search=true#Post5825532)

Most of the relevant details are still the same, except the house is now worth about $320,000 /images/graemlins/smile.gif

Myrtle

02-12-2007, 09:25 PM

[ QUOTE ]
[ QUOTE ]

The reason I started this thread was to attempt to get some clarity on the subject.

[/ QUOTE ]Here's something that I just remembered. I recently saw a TV documentary about a musician (who incidentally happened to be the best player in modern times of his chosen instrument), a truly world class artist, and buried amongst his many phrases in that interview was something that I found to be extremely profound and significant. Though I'm sure many people will see little to it:

"Y'know, for most of my life I struggled very hard to remain poor."

[/ QUOTE ]

Mickey,

I did not miss the gist of the above, and it certainly widens the scope of the discussion in this thread from beyond the practical and financial and moves it towards the ideological and philosophical.

I think you have brought up an important aspect, and feel that it should be brought more into the discussion.

At its' base, it asks the "WHY" question. Why do we want to own a home?

I'll start the ball rolling with a few of my own reasons, right or wrong....

I want the freedom (within reasonable bounds) to be master of my own castle. Until one 'owns' (debt free) ones own abode, one is not totally free in that manner.

The above statement encompasses a myriad of points.

What can I do if I own vs. if I rent? In terms of personal choice and freedom (leaving aside the financial implications of both conditions for the moment) the difference is huge.

If I own it, I can modify it (within local laws) in any way that I see fit to suit my family's style or utility.

How much is that worth in regards to state of mind? I can't speak for anyone other than myself, but to me it is huge.

There are three basic conditions under which one procures shelter. Rent…….Own (with a mortgage)…..and own (debt free).

Each has its’ advantages and disadvantages, and as SossMan points out in his ‘pokeresque’ response to one of my posts, the answers are many and ultimately boil down in many cases to…..”It depends’.

Not to be a smart ass, but I anticipated (and hoped) that by asking my simple OP question, that we would get a good, expansive range of responses, and I thank all for their contributions so far.

I can’t help but feel that there are many other sides of this issue to be discussed.

Myrtle

02-12-2007, 09:40 PM

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
so much bad advice in this thread, I don't even know where to start. not really bad advice, per se, but imagine a realtor message board having a thread about texas hold'em poker strategy. yeah, it's like that.

[/ QUOTE ]

Soss,

The reason I started this thread was to attempt to get some clarity on the subject.

If you feel that you have something of value to add, please take the time to do so.

[/ QUOTE ]

i can respect the response, but seriously imagine trying to answer questions or give suggestions to a bunch of realtors about their very general poker advice. the answer to so many of these questions is the same answer to so many poker questions...it depends.
Most everyone has a unique situation that would require a bit of analysis (personal and financial) to generate good advice. Without that, it would be like me saying...play tight aggressive and don't fold AA preflop.

[/ QUOTE ]

Ignorance of the nuances of real estate investment are a concern with either issue, but there is a difference between

- analyzing an individual decision
- analyzing the global state of consumer debt in America, particularly home debt.

OP was interested in the latter, and although we've mostly only gotten anecdotal evidence in this thread, it is good thing that the issue has been raised, even if no one leaves this thread with answers to the difficult questions.

Whether I understand the nuances of most Americans' personal situations, if a large percentage of them live in "purchased" homes of which they actually own a small percentage, even I can see that this is a window into a broader economic problem.

Between home debt and credit card debt, Americans spend a ridiculous percentage of their future incomes to satisfy current needs/wants. Whether individuals exist whose situation allows them to/indicates that they should put 20K down for a $600K place, or pay interest-only for years, a housing market full of these people cannot be a good thing, especially because we don't know how America's role in the world economy will change in our lifetime. If you are 25 and buying a place that you expect to finally pay for when you are 55 (or you expect whoever you flip it to will pay for it in thirty years), you should think a little closer about how sure you are about your ability to earn enough in thirty years to pay for it and everything else you've bought in between. I'm not talking about a standard thirty-year mortgage that you finally finish paying in thirty years, while paying a sufficiently small % of your monthly income and saving for retirement, etc; i'm talking about methods to delay and delay and delay, so that you can spend and spend and spend, ignore saving for retirement, all while (apparently) counting on income from ages 50-65 to finally pay for the house.

Credit is not a free pass. At some point, someone pays the bill. And if the economy is full of people who can't, the rest of us will end up bearing part of the burden, through higher taxes, a weaker economy, lower home values, etc. We aren't even discussing the economic disaster that 60-70 year olds with no retirement savings might be in thirty years while SS crumbles.

I'm not smart enough to analyze the details of this problem, and I haven't studied enough economics to state any meaningful conclusions, but anyone with a little common sense can see that it is a problem (or at least, *if*, say X% of Americans own <30% of their home, and the remainder owed is Y% of their expected future income, for large enough values of X and Y, we have a serious problem, especially given general saving/spending/debt habits of the average American).

[/ QUOTE ]

Thanks much for a well spoken and thought out response.

Yup, I'm more interested in the latter point as you point out, but not at the total expense of the first point.

I can only speak for myself, but once I made my personal decision to progress down the path of 'home ownership', the reality of the larger, second broader point then came to the forefront, and now in hindsight points out to me possibilities that I never considered when I made the original decision.

The more I learn, the less I know.

turnipmonster

02-12-2007, 09:46 PM

this is great, but this line:

"If we add up all the good and the bad future values, we can say that this investment would be worth X less than if you had not spent any money and just invested in the market. Well, not quite, you would still have to live somewhere."

is weird. they should just have a box where you put what your rent would be if you were to rent instead and invest in the market.

meep_42

02-12-2007, 10:33 PM

[ QUOTE ]
[ QUOTE ]
If you own more of your home than the absolute minimum to ensure the lower rate possible on your mortgage, you're leaving money on the table. Owning a home outright is for retirees and suckers, but mostly just suckers.

-d

[/ QUOTE ]

Please elaborate. My home is fully paid for while other suckers have 1000+ mortgages each month. I'm playing about 5K every month into retirement accounts partly because I don't have a mortgage to pay. Keep in mind these are after tax dollars, so to save a grand per month on your mortgage requires 1500 of actual income depending on your marginal tax rate. Now having said that, I'm in Canada and mortgage interest is not tax deductible whereas in the U.S. it is, so in the U.S. having a mortgage versus not would be a closer decision...in Canada it's a no brainer to pay it off ASAP. If you have a mortgage of 5% and pay it off, that is like making a risk free return of 8% after factoring in taxes. Let me guess...all of you ballers will easily get 20% return every year for the rest of your lives....lol....see dot com crash from a few years back for a reality check suckers.

[/ QUOTE ]

You can take the money you have in your house -- say 60% of it, and put it into investments that easily eclipse the interest portion of your mortgage, especially considering that you're paying less than the stated interest rate on that mortgage due to the gigantic tax benefits given.

Example -
Step 1. Take out $250k of a $400k home.
Step 2. Invest it getting 7-8%, while paying 3.5-4% on the money.
Step 3. Profit.

The whole point of buying a home is that you're leveraging your down payment to invest in the appreciation of the entire asset -- so keep your money making money.

-d

meep_42

02-12-2007, 10:35 PM

Prime,

There's quite a difference between debt and bad debt, which is why every corporation in the world, profitable and not, has a lot of it.

-d

PanchoVilla

02-12-2007, 11:25 PM

I am looking at this issue now. I bought a new house and moved then put up my old house on the market. Initially I just planned to take all the proceeds from my old house once it sold and pay down my new mortgage. Then I did the numbers.
Option A is keep a 625k mortgage (jumbo, 80% of house price) and invest 208k and assume a 5% return.
Option B is to pay down the loan to 417k which turns it into a conforming loan and refi saving about .25-.375% on the rate.

In my case, with my rates between 5.75 and 6.25% range Option A is about 2900 a year cheaper due to the tax deduction. Its just an issue of making sure that I have the right amount of liquidity to cover the oops my wife or I lost our job for 6 months case. As long as you can handle the payments either way, I will take the extra 3k a year. Of course my wife would prefer to have 0$ in stocks and own 95% of the house, but I am working on her.

Mortgage loans are the cheapest money you can ever get. May as well take advantage of it. Just be smart and don't overextend yourself where you can screwed up by short term fluctuation.

Pancho

LearnedfromTV

02-12-2007, 11:33 PM

[ QUOTE ]
Prime,

There's quite a difference between debt and bad debt, which is why every corporation in the world, profitable and not, has a lot of it.

-d

[/ QUOTE ]

To my earlier post let me add that there is a big difference between

- using the fact that a bank is willing to loan you money on your house at 4% or 5% or 6% to invest in securities you can reasonably expect to earn better than the rate you pay.

- using the fact that a bank is willing to loan you money at 4%-6% (or higher) on your house to buy a bunch of [censored] you don't need while delaying paying it off based on expected future (often far into the future) income.

The second one is obviously better than putting everything on a credit card; it's still, imo, dumb, if the scale you are talking about is enough that you need to borrow against the entire value of your house, often up to several multiples of the amount you've actually paid into the house.

As for newly-indoctrinated real estate "investors" leveraging each new loan into more highly leveraged properties, ad infinitum: in all but the most expert hands, this forces one to take on more risk than any sane person should accept. Money isn't free!

meep_42

02-13-2007, 12:00 AM

Learned -

Noted, and I agree.

-d

SossMan

02-13-2007, 12:32 PM

Let me get this right....you are borrowing at 6.25% to reinvest it at 5%?

How is this a good idea?

SlowHabit

02-13-2007, 02:59 PM

[ QUOTE ]
Let me get this right....you are borrowing at 6.25% to reinvest it at 5%?

How is this a good idea?

[/ QUOTE ]
It's not.

Kneel B4 Zod

02-13-2007, 10:21 PM

below is a spreadsheet a buddy of mine built. it is a buy vs rent case, with the following key assumptions:

buying: $500k house, 10% down.
renting: $750 in monthly rent (what I pay now), and opportunity cost of 10% (ie I could invest the assumed $50k down payment and get 10% annual returns in the stock market or via other investments).

the other assumptions come from historical averages (annual appreciation of a house) and expected expenditures (capital improvements on a house)

everything else is more or less formulaic - what you see are the tax benefits, the interest payments, property taxes, brokers fee, etc - basically all the nitty gritty that people forget about.

the NPV lines shaded in orange are the Net Present Values of all cash flows you can expect in 2 scenarios: a 5 year period and 10 year period.

negative means that in either case you have a net outflow of cash, however renting is much much cheaper. even turn this into someone paying $2k in rent, and renting is cheaper. ditto for changing 10% oppty cost to 8%.

note that the assumed appreciation of a house is slightly below historical averages, but I think this is realistic given that we are in the midst of a gigantic housing boom.

http://img185.imageshack.us/img185/74/buyvsrentwz4.jpg

Myrtle

02-14-2007, 08:36 AM

Zod,

Quick question for you. It appears that you're comparing paying rent of of $750/mo. vs. buying a $500K home.

For this comparison to make sense, it seems to me that one has to get like value in either situation, so I have to ask you, where in MA can you rent a $500K home for $750/mo?

If I'm missing something, please point it out.

Thanks......

Kneel B4 Zod

02-14-2007, 09:45 AM

Myrtle,
The model was built roughly for my situation. I pay $750 in rent b/c I have a roomate. A house or condo I would want (2 bedrooms, 1.5 baths, decent condition,, similar to where I am living now, would cost around $500k.

however, I am assuming I would be living alone if I bought a house, which is part of the problem you noticed. so instead I ran the model changing the assumptions:

I pay $1,200 in rent now (I live in a 1 bedroom)
I will buy a more modest 1 bedroom condo for $350k.

I also lowered the oppty cost to 7%, which would mean taking a more conservative approach in the stock/bond market.

Even in this case, the 5 year NPV of renting is -$50k, and the 5 year NPV of buying is -$80k. In 10 years the NPV's come closer together, but renting is still $20k cheaper.

all of the above assumes that the next (first) house I buy is not a 30 year house - my 2 base time horizons are 5 years and 10 years. if I had a wife and 3 kids and knew there was a decent chance I would be buying a house for the next 25 years, then buying becomes much more attractive.

the trouble with short terming buying (5 or 10 years) is that the interest is a KILLER. depending on your assumptions (which are everything here), the costs become equivalent sometime around year 12.

if you want to play with these numbers yourself, try a similar calculator like this (http://www.vickiwongteam.com/calculator_rentbuy.htm) one.

Myrtle

02-14-2007, 10:49 PM

[ QUOTE ]
Myrtle,
The model was built roughly for my situation. I pay $750 in rent b/c I have a roomate. A house or condo I would want (2 bedrooms, 1.5 baths, decent condition,, similar to where I am living now, would cost around $500k.

however, I am assuming I would be living alone if I bought a house, which is part of the problem you noticed. so instead I ran the model changing the assumptions:

I pay $1,200 in rent now (I live in a 1 bedroom)
I will buy a more modest 1 bedroom condo for $350k.

I also lowered the oppty cost to 7%, which would mean taking a more conservative approach in the stock/bond market.

Even in this case, the 5 year NPV of renting is -$50k, and the 5 year NPV of buying is -$80k. In 10 years the NPV's come closer together, but renting is still $20k cheaper.

all of the above assumes that the next (first) house I buy is not a 30 year house - my 2 base time horizons are 5 years and 10 years. if I had a wife and 3 kids and knew there was a decent chance I would be buying a house for the next 25 years, then buying becomes much more attractive.

the trouble with short terming buying (5 or 10 years) is that the interest is a KILLER. depending on your assumptions (which are everything here), the costs become equivalent sometime around year 12.

if you want to play with these numbers yourself, try a similar calculator like this (http://www.vickiwongteam.com/calculator_rentbuy.htm) one.

[/ QUOTE ]

ty for the clarification.

Just wanted to ensure that we were comparing apples to apples.