Sunday, April 6, 2008

Rent Vs. Buy Myths That Ruined the Housing Market

Rent Vs. Buy Myths That Ruined the Housing Market

Potential buyers bought into all sorts of rent vs. buy myths to justify buying houses that they could not afford during the boom. Now that the U.S. housing market is in shambles, people are starting to realize that renting may not be a dirty word after all.

Myth #1: Renting is Like Throwing Your Money Away

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don't pay interest to the bank, property taxes or maintenance fees. They pay rent.

Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.

Myth #2: There are Tax Benefits to Owning

Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents.

Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone--including renters--is allowed to take.

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the 'tax benefits' of owning into a buying decision.

Myth #3: It Doesn't Cost Any More to Buy Than It Does to Rent

People can usually rent a home by paying first month's rent, last month's rent and possibly a security deposit. All the money that is paid initially actually goes towards monthly payment obligations, with the exception of the security deposit, which is nearly always returned to the renter in the end.

When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent 'investment' ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.

Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.

Myth #4: Buyers Have Assets, Renters Do Not

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.

Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the 'investment' they made through mortgage payments is gone--dried up virtually overnight through no fault of their own.

Renters may not co-own a home with a lender, but this doesn't mean that they don't have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven't been paying a lender to 'rent' money so that they could pretend like they own an asset.

Myth #5: Houses are a Good Investment

During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.

The reality is that housing is not an investment. It's shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn't be further from the truth.

Although home prices can go up (and down), the rate of appreciation on housing does not surpass inflation levels over the long-term. Between 1890 and 2004, the real return on housing was a pathetic 0.4 percent per year over the last 100 years, according to Robert Shiller, a housing expert and Yale economist.

Real estate investments aren't that much better over the short-term. The gain in new home prices over the last 20 years has been a mere fraction of the Dow's gain. The average person investing in stocks between 1987 and 2007 would have made more money than the average person who bought a new home in 1987.


...It is pretty funny reading this article, because the whole reason I stopped renting to buy a condo at the end of 2005 was because I was convinced I was "throwing away my money on rent" and that buying a condo would be a great investment that I could sell for a big profit in 3-7 years.

Instead my condo has turned out to be a financial disaster that has imprisoned me.

I really fell for these myths and got suckered.


Russ DoGG said...

Instead my condo has turned out to be a financial disaster that has imprisoned me.

I really fell for these myths and got suckered

Yo Chris can you knock down the price and get out already? Or walk away of oyu are upside down? Your condo is still blacklisted by WaMu right? Nobody will get a loan for purchase? Rent it out! Sounds like its time for you to shit or get off the pot.

Better take a low price sale than continue to pay the mortgage and taxes on a place you don't want to live in anymore.

I noticed so many people from Oakland And Macomb county would wait for YEARS unable to sell houses, toys (motorcycles), etc at the price they stubbornly determined to get. In each case they spent several times the difference in price in carying costs. But their stupid egos couldn't face selling at a capital loss, and so compounded the problem.

One fool had a gaudy supercharged tricycle with skull and bones metal emblems on it. Yess- like the munsters. Wouldn't sell it for a loss. Spent several times the difference carrying the loan and taxes while advertising it to sell.

Michiganders are so funny about that.

Russ DoGG said...

"... it's really not my habit to intrude
Furthermore, I hope my meaning won't be lost or misconstrued
But I'll repeat myself, at the risk of being crude
There must be fifty ways to leave your [real estate]lover"

You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free
Hop on the bus, Gus
You don't need to discuss much
Just drop off the key, Lee
just listen to me

Arp said...

I definitely fell for those myths. It was a helluva learning experience (though potentially bad, depending on what my house sells for). Given a choice, I wouldn't buy again unless 1) I had a massive downpayment and 2) I wanted to live there for the rest of my days.

Ah well - live & learn. And hope not to lose my shirt in the process...

Chris said...

Russ Dogg.

If I could sell it at a reasonable loss I would. The problem is I can't do that.

890 Sq Feet, With detached 1 car garage. With closing costs rolled into the mortgage my total amount was about $87,000 dollars.

I still owe about $67,000 dollars.

If I was to get what I paid I would walk away with $20,000 (18,000 down payment and about 2000 in built up principal equity)

The problem is I don't even think I could get $75,000 for the place right now because the market is just so bad.

It is simply not worth losing $20,000 and getting completely wiped out, when I know that I paid less than 100 dollars a square foot and that the price will eventually rebound once things improve.

This is not a Miami condo where I paid 300 or 400 a sq foot and will never make money back.

The amount of money I pay on my mortage is actually the same or even LESS than I can rent the place out for so it is a cash flow positive property.

The problem is I just dont trust renters. If I buy a second house and have to pay two mortgages because the renter flakes out on me I can potentially lose the condo to foreclosure due to a flakey renter.

So as you can see I can't sell the place without losing my life savings. And even though I can rent it out for the carrying costs I don't feel like I can trust a renter.

Its a tough situation.

Russ DoGG said...

$20 grand??? < 100 per square foot? Grand Blanc? Condo with a detached garage? You didn't get suckered. You just bought a great long term rental property investment. I had difficulty finding a rental w/ a garage when I moved to Macomb County in 97.

you just made a Perfect case for renting it out. Ive known people who rented out small houses nad condos like that and made out well after some number of years. Royal Oak is full of little 900sf houses being rented out. Being cash flow pos these made decent little savings accounts for the owners. Some were a bit rough but they could get rehabbed with a little sweat equity.

With difficulties getting loans you'll find a better class of people who may approach you for renting it out.

Of course an engineer I knew had her renters burn her house down. But you can get insurance for that. And that was 2004. Scummier renters back then.

Anonymous said...

Dude--ITS A $70K CONDO!! Who gives a shytt if you rent it out!

I couldn't buy a decent condo where I live for $300K, so damn! At $70K or less, I wouldn't give a shytt if I rented it out to CRACK HEADS with Pissing Pitt Bulls and 12 kids.....LOL

Plus don't give renters a bad rap like that. Seriously, some of the smartest, most educated people I know CHOSE to RENT because it just makes more sense right now. They just might not want your crappy $70K Condo though.....eeewwwww....termite heaven!!

Chris said...

Its actually a pretty nice 2004 built condo with brand new appliances.

Russ DoGG said...

I repeat..

In each case they spent several times the difference in price in carying costs. But their stupid egos couldn't face selling at a capital loss, and so compounded the problem.

Michiganders are so funny about that.

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