Jan052012

Potential buyers wisely choose to rent during a bust

When house prices were going up, everyone wanted to own to capture appreciation. When house prices started going down, those who recognized the trend wisely chose to rent instead. As the bust drags on even the most kool aid intoxicated are beginning to see the wisdom in renting. Better to throw your money away on rent than to throw it away on interest to support a depreciating asset.

6 Reasons Why Buying A Home Is Like Throwing Away Money

Girls Just Wanna Have Funds | Jan. 1, 2012, 10:04 AM

Most people see buying a home as a part of the “American Dream”, well for most it’s become a nightmare.Buying a home is pretty much the best way to throw your money away and here’s why.

Renters win because they have the flexibility that homeowners do not and after 30 years alone of paying interest to the bank, you’ve lost out on any potential monetary benefit.

Renters can move at any time of their choosing. Owners are forced to wait to either sell the property or find a renter they hope will care for it. Often renting is not a good option because they money they need for the down payment on the next house is tied up in the last one. If they are loan owners and have no equity, even renting may not be a viable option as the cost of ownership may exceed what they can obtain in a rental.

The rest of this author’s statement about losing out on potential monetary benefits is silly. Long-term owners who pay off a mortgage own a valuable asset outright. That has tremendous financial benefit. Of course, paying off a mortgage is more difficult than it used to be because the temptation of HELOC spending is too much for many to resist.

You never truly own the home.
Even after paying off the mortgage, there’s still property taxes, HOA fees, home insurance and other mandatory costs which make buying a home a veritable money pit. You must consider every single penny that you spend in direct or indirect relation to the home.

There is no free lunch, but owning a home outright is certainly the best method for reducing the expenditures on housing to the absolute minimum. Renters pay those same costs indirectly, and they never own anything.

Five years ago, real estate investors would only consider the purchase price and subsequent sales price to determine the profit made. Nowadays with reduced and nonexistent equity, investors are looking at every penny to determine whether or not the deal is worth it.

Investors always should have been looking at every penny carefully. It’s dumbass speculators who spent without regard to cost because they believed a greater fool would come along.

Renters only rent.
No HOA fees, property taxes, home insurance, home repairs or any other cost usually handled by the landlord. The counter argument here is that the landlord rolls all of these fees into the rent. However, consider that while this may be true of some rentals, it is not of all rental. In some cases, doing this drives up the rental rate which makes it unattractive to most renters. Consequently, there are many landlords who eat the cost of extraneous fees as it is better to have someone in the unit than have it empty.

Yes, cost has nothing to do with revenue. Landlords do not pass costs on to renters. The market determines what rent a property will bear. If a landlord has not overborrowed, this will cover the costs and turn a profit.

There is no guarantee of a “permanent home” with home ownership.
As we’ve seen with the recession, should you lose your job and exhaust all reserve funds, you are out of luck and that home will be sold to the highest bidder.

The possibility of foreclosure never entered people’s minds during the bubble. It was always assumed the house would be sold later for a profit because real estate always goes up in value. Now we know real estate does not always go up in value, and a greater fool willing and able to take on larger debts may not come along.

Renters can usually rent for as long as the landlord will allow or needs a renter in the home.
If a renter loses a home, there’s the option to get a cheaper rental until things get better. When you own a home, even if your financial situation changes, you must continue to pay the mortgage payment as agreed upon during closing.

Renters are rarely forced out of rental properties. In fact, far more “owners” have been forced out of properties over the last few years than renters. Most landlords won’t raise rents because they would rather keep a stable tenant than face vacancy.

Buying a home locks you in for as long as you own the home.
Think you’ll just sell it? Fat chance. Given that most homeowners who bought their homes in the last ten years are underwater, good luck. Though it isn’t impossible, the only chance of getting out is to strategically default or sell via short sale if you’re underwater. Both options trash your credit since the originally agreed upon balance isn’t what the bank receives in the end.

Nobody who bought in the last 10 years thought this was possible, but it’s the reality of life today. Hopefully, people will learn something from the experience, but I have my doubts.

Renters on the other hand are free to go at the end of the lease which can be month to month upwards of two years. There’s also the option to break the lease with a fee paid which equates to 2 months or that may be waived if the renter or landlord is able to find someone to replace the renter.

There is no denying renting is freedom.

Today’s economic conditions require a 20% down payment. In some areas, this can be as much or more than $100k for a starter home. Once you sink the money into the home, you don’t see it again unless you’re lucky enough to sell at a profit.

It used to be the case that you didn’t see the down payment money until the property sold, but we all know how lenders allow buyers to “liberate” their equity with HELOCs. I see no indication that lenders won’t do this again once prices start going up.

This is a gamble and unfortunately, many homeowners come out on the losing end.

Actually, it’s mostly the lenders who came out on the losing end because the indebted borrowers can’t pay them back.

Renters only need to put down the 1st month’s rent and security deposit. The latter is returned at the end of the lease term.

Home ownership is no longer an investment. With the recession, this became a daunting reality for many homeowners. Home equity became non-existent which meant kissing good bye the good ole “forced savings” theory. For this reason alone, renters come out on top since the lack of an investment potential makes the argument that buying is more advantageous a moot point.

Renters in this case, just pay rent with no expectation of long term investment potential.

Renters don’t participate in the ups and downs of the housing market. This looks foolish in market rallies, but it looks prescient when prices crash. Once prices begin their descent from bubble highs, renting is by far the wisest choice.

Homeowners are responsible for the cost of all repairs and upgrades. This is self explanatory. As a homeowner you are responsible for every single repair that comes your way, renters only pay for repairs that are a result of intentional damage or negligence. Otherwise, the landlord pays for everything.

Renters don’t deal with repairs unless the resulting damage is their fault.

Now see how you can walk away from your mortgage and live scott-free for years >

Have I gone bullish?

I have clearly stated that I believe prices will go down. I have also noted on many occasions recently that payment affordability is at or below rental parity in most areas in Orange County. So am I bullish or am I bearish?

With declining prices, there is no urgency to buy a home. If you chose to wait and rent, prices will likely get better. However, with the ability to lock in a cost of ownership below the cost of a comparable rental, there is a new reason to buy. It’s not for everyone, but for someone who plans on long-term ownership, the savings versus renting each month is enticing.

Renting is still the best course of action. I will rent at least through the fall of 2013, partly due to falling prices, and partly due to my buying cashflow properties in Las Vegas instead. I would prefer to wait until interest rates go up and buy at the top of the interest rate cycle. However, the federal reserve seems intent on dragging that out for another 10 years. I don’t want to wait that long.

Buying when interest rates are below 4% opens the possibility of having an interest rate lower than the rate of inflation in the future. In that circumstance, the money you repay is losing value faster than the rate of interest you are paying. In effect, you are being paid to hold debt. At some point in the not-too-distant future, inflation will make the adjusted cost of today’s debt very low. It’s one of the reasons I like taking on 30-year debt for cashflow properties.

So have I gone bullish? No, I am just pointing out the realities of the current situation and acting accordingly.