Market Conditions: Are Luxury Rentals Now the First Choice Versus Condo Buying?
Sorry everyone, but I have to go out of town suddenly.
There won’t be any more posts the rest of this week.
But things are heating up so we’ll be back to the chatter next week.
Meanwhile, to have something to chatter about, many others are trying to figure out what is going on with the Chicago market.
What’s causing the slowdown in home sales?
One Chicago realtor, John Irwin, believes that it could be the thousands of luxury rental apartments.
Chicago has historically been a difficult town for rentals. Aging properties and low inventories have dominated the market in the past; however, all of that is changing.
Literally thousands of new luxury rentals have hit the market since 2017 and over 7000 new units will become available in the next few years. In Lincoln Park alone, over 800 luxury rentals will be available on Lincoln Avenue from Wrightwood to Fullerton.
Many of these new construction buildings offer state of the art amenities such as common work areas, plunge pools and sun decks, fitness centers and Starbucks Coffee machines in the lobby.
For buyers considering buying homes priced up to $800,000, renting is now an attractive alternative to buying, particularly for the younger demographic.
It is no coincidence that we are seeing lower home sales and rising inventories in these same price points.
How Home Sales And Inventories Could be Affected
Using Lincoln Park as an example, 1465 homes priced under $800,000 were sold in the past 12 months.
If half of the potential 800+ new renters in the Lincoln Avenue corridor were people who would have normally purchased a home, 400 less home sales would have a dramatic effect on the market.
Based on these numbers, Lincoln Park home sales could drop 13.6% in the next 2 years due to buyers turned renters.
With the tax changes removing most of the benefit of owning a higher priced home with a larger mortgage and property taxes, will many potential buyers simply just rent for the next few years?
And what will that do to the market for the luxury one-bedroom condo or starter 2/2?
Chicago wasnt a transient town for most college graduates. If you went to most Big10 or smaller state schools, Chicago was the preferred destination. With today’s job market and Millennial attitudes, this doesnt hold true.
“And what will that do to the market for the luxury one-bedroom condo or starter 2/2?”
Ones that appeal to Empty nesters will survive the rest will be crushed and become apartment conversions
Renting offers flexibility and the monthly rate is often less than the mortgage + taxes + hoa for a comparable condo or townhouse.
Many folks perceive the market to be maxed out and don’t see their potential property value increasing nearly as fast as the taxes will.
Plenty of people would rather leave that 150k+ down payment in the market or in a conservative investment vehicle.
A lot of younger people share the sentiment that you don’t really “own” your home if you carry a mortgage and then you become a slave to your debt.
At the end of the day, buying a place in Chicago doesn’t offer many perks but carries a whole lot of potential downside, especially with a recession looming on the horizon.
I think a couple of things are happening.
First, I think younger people are a bit more mercenary when it comes to jobs so they aren’t as settled in their careers and even what cities they want to live. As such, having flexibility to relocate easily is desired which leaves renting preferred over buying in the short term unless you are willing to take big financial risks.
Second, the luxury rentals are offering apartments that in many ways are nicer than many of the “used” condos. There are a lot of condos on the market from early 2000s that are dated compared to the favored interior designs currently. So people just rather rent something current than buy something dated.
Buying is a huge gamble unless you are really settled in your life and careers. If you find yourself having to relocate in two years, you could be taking a huge loss.
If I had the same rental options available like today when I bought my first condo, I think I would have just continued to rent until we bought a house.
“Starbucks Coffee machines”
?? What is that? A verismo? Are apartment buildings actually touting that as a feature?
Millenials are less likely to change jobs and less likely to move when compared to previous generations. Russ’s first point is completely false and built on false stereotypes.
https://www.vox.com/the-big-idea/2018/7/11/17559484/gig-economy-jobs-rooted-rootless-moving-job-hopping-millennials
We’ve had a harder time buying houses/condos due to affordability issues. Because housing price increases have been greatly outpacing wage growth and the amount of time it takes to save for a down payment has doubled in most major US cities. Chicago continues to be one of the most affordable major metropolitan areas in the US. I own a 2/2 and I expect that the demand for the 1/1 and 2/2 in the $300-500k will remain constant.
https://twitter.com/ByRosenberg/status/1054474482268532736
https://twitter.com/ByRosenberg/status/1054782909171683328
Renting also allows you to avoid the guaranteed raises in property taxes that are crushing homeowners in this city. I’ve resigned twice with the same rent while my landlord has to deal with property tax and assessment hikes. Who wants to deal with closing costs, transfer taxes, etc, when you can get two months free at many of these new highrises. When your lease is up and the apartment company wont give you the same deal, move to a newer high rise that is offering two months free.
?? What is that? A verismo? Are apartment buildings actually touting that as a feature?
No. Think big coin op vending machine, and yes they do
“Buying is a huge gamble unless you are really settled in your life and careers. If you find yourself having to relocate in two years, you could be taking a huge loss.”
If you’re in the market for north of $500MM properties you change jobs/location and the company isn’t paying moving costs (+ taxes) and not paying realtor fees/buying outright, you’re doing it wrong.
I hope we’re done with the days of “luxury” condo buildings with zero amenities.
Someone I know bought a “luxury” condo a few years ago. The condo itself is nice enough. But, there is no amenity space in the building. Condo board meetings are held with a few folding chairs in the space outside the first floor elevators.
“No. Think big coin op vending machine, and yes they do”
WTF?? Actual coffee, or just that dirty, sweet, milk in a bottle (or can) crap?
That’s a crappy “amenity” for a B- college apartment building, nevermind a luxury urban apartment.
“If you’re in the market for north of $500MM properties”
Wait–who is in the market for $500 million properties?
“Buying is a huge gamble unless you are really settled in your life and careers. If you find yourself having to relocate in two years, you could be taking a huge loss.”
I think there’s more understanding of this than there was back when I first bought. Then I recall still thinking in terms of 5 years, but figured in the back of my mind that it wasn’t the end of the world if I sold more quickly. Now I think people are much more aware that this can be a risk and they might get stuck.
“If I had the same rental options available like today when I bought my first condo, I think I would have just continued to rent until we bought a house.”
I wouldn’t have, but I can see this — getting in-unit washer/dryer was a perk for me, but wanting to own (and the tax advantage) were more so. Tax incentives have changed (with increased property taxes and overall higher taxes plus the cap, although I still think my entry level wouldn’t be affected by that.
I do have the impression that what the average GZ Chicago buyer wants in a place (rental or purchase) is much more high-end/luxurious than it was back when I first bought in my 20s in the late ’90s. I’d lived in the second floor of an old house turned into a 2-flat in LV and so probably had different expectations than people who have been living in a luxury apt, but more of the latter being available perhaps is a big part of why people’s expectations are different.
“I recall still thinking in terms of 5 years”
Traditionally, it was 7 years. 5 has become pretty accepted, tho.
“Wait–who is in the market for $500 million properties?”
Kenny Griffin and…
“Traditionally, it was 7 years. 5 has become pretty accepted, tho.”
Agree, but I think back in the day (don’t know when it started, but I’d say by the late ’90s, maybe before, and until the bust), there started to be this idea that you could buy and sell in a shorter time (even shorter than 5, in the minds of some) and still be fine.
Buying a small 2/1 or 2/2 for a few years before having kids is going to be more popular if you aren’t worried about the risks of having to sell at a loss (once you add in transaction costs). I suspect it’s seen as more risky now than it was for a while pre bust (but maybe people have shorter memories than I give them credit for — I do think it may be one reason for Millennials to be more apt to wait before buying).
Are there comparisons of median age at first purchase? That might be interesting.
“once you add in transaction costs”
That’s the killer.
And moving costs, too. I hear that it’s $25,000 to move across town now!
I think that I agree with Stephanie. In addition to the factors directly affecting the real estate market – and most of them are pushing in the negative direction big time like the double whammy of property taxes and deductibility – there’s a huge cultural component.
The market is an aggregated series of actions, not equations, and people act for reasons that are complex and reactive. Not many people decide when to buy real estate based on data or a spreadsheet – they buy it based on preference, what their friends and family do and say, “conventional wisdom”, stuff they saw in the news, etc.[FN1] Most people probably know someone who got crushed by real estate in the Great Recession, and there is far more awareness of the downside risk that tens of millions of people have taken to heart. Add that to changes in the employment market and differences in expectations based on social media and other cultural changes. So you’ve got a bunch of folks who are making good money, maybe could buy, but tell themselves that they are responsible by renting the $4200 2/2 in a luxury building, maybe with a buddy or their significant other. And that’s what everyone does and there is plenty to do in areas and they build more and open more cool places where these buildings and more people want to live there, so the cycle is reinforcing itself for now.
And then eventually there will be a snap back and adjustment.
[FN1] One factor I haven’t seen mentioned is that a lot of people made bank in Chicago real estate in the late 90s / early 00s. Not at all uncommon for a few years to take a place – a normal 2 or 3 bedroom condo in a midrise or 4 flat, townhouse, or something like that, that many young professionals could buy – live in it for 2 or 3 years, and sell it for like 30-50% more and make great money. Buddy of mine bought a standard Bucktown townhouse in maybe 2000 for $300k, sold it in 2003 for $490k. And then cycled through again. People felt like they had to get their money in the game and they wanted to go all in. If you were renting it was generally because you weren’t settled and didn’t know you would be here for 2 years, or if you just got here and you were staying you were looking to buy pronto. Buy a place with your brother, your buddy, get roommates to help pay the mortgage, whatever. There is a reason they built all the crap they built back then, because people were throwing money at anything. That snapped back the other way – the zeitgeist went from “Bro, you can’t keep renting – you are throwing money away, look at these transactions, don’t you want to make six figures tax free” (and they were right) changed to “why would I buy, my parents say don’t, my friend has a sick lux rental, my uncle went bk and got foreclosed on in 09, maybe I’ll move to Asia or Cleveland” over a pretty short period of time.
I know this discussion is largely focussed on the demographics of first-time buyers versus renters. Most in this group would not be in a position of being able to pay cash for buying a condo. But if you were (rich parents?), you still can’t get around the fact that the bottom line cost of owning a place is way lower than renting the exact same place. Because savings/MM rates are so low (even the best internet bank rates have only just inched up to 2%), if you still feel a place to live is a better place to park your money than the stock market, you’re talking about lost opportunity cost being only around $600/month for paying cash for a full-service 2 bd/2ba $500,000 nicely updated condo in the GZ. (This is based on getting 2% minus income tax on the interest.)
If said condo has an HOA fee of $700 and property tax of $7,000 (both reasonable assumptions), then the total monthly “cost” comes to a bit less than $1,900. If you were to rent the exact same place, it would probably cost around $3,000/month. Yes, there are closing costs and occasional maintenance costs that are involved in owning a place, but do you think these amount to $13,200 per year (difference between cost of renting and owning)?
This is not even taking into consideration any possible appreciation in value during your time of ownership. Yes, the last ten years have shown that this is a gamble, but you have to use a bit of common sense and not buy at the top of the market. It is not a big secret when the market is good for sellers versus buyers. But I don’t take this factor into consideration when crunching numbers on buying/renting because you never know. But at least, even if the condo appreciates by 1 or 2 percent a year, this takes care of the cost of the realtor’s commission even if you have to sell in only two or three years.
If you’re talking about owning in a building that is not full service, and has much lower HOA fees (typical nice LP walk-up has HOA of $150-$200), the value of owning versus renting is a way more. Many people (including I) simply do not care about rock-climbing walls or coffee centers or swimming pools, and would consider a building with myriad services as my HOA money going down the toilet. But if you do want all the amenities that these new luxury rental buildings offer, you are talking even more than $3,000/month for a 2bd/2ba.
I know these are big “Ifs”. IF you had enough to do a cash purchase, IF you buy at a reasonable time when the market is not on fire, IF you are reasonably sure you will not have to sell within 3 years. But if you do happen meet these three “Ifs”, there is no question that you are better off financially buying rather than renting in one of these fancy luxury new rental buildings. There should be enough people who meet these criteria so the condo market should not collapse!
“And moving costs, too. I hear that it’s $25,000 to move across town now!”
————————–
Touche, but I do believe I corrected that to include some new furnishings and fixtures, not just muscle and bubble wrap.
I think we are due for another crash, but this time, not just in housing, but across industries, leading to a global depression. I am tempted to sell, park my money in Swiss bonds, and rent instead. Hopefully the Swiss Franc will be able to hold some of its buy power when hyper inflation hits the US.
“some new furnishings and fixtures”
I’m just messing around, of course, but to the extent that it is true (and it largely is), that’s a significant entry/exit cost, too.
“HOA fee of $700 and property tax of $7,000… the total monthly “cost” comes to a bit less than $1,900”
I would also look at the monthly outlay, which would include the mortgage payment. A $500K 2/2 is going to have a monthly payment of about $2,400. Total outlay is $5,300/month.
The comparison becomes $3,000/month to rent or $5,300/month to own.
Oops, fat fingered the calc…
The comparison becomes $3,000/month to rent or $4,300/month to own.
Multitude of factors come into play here. Attitude and debt load of 20 somethings is a major one, sure. But the more desirable places are just simply not affordable for most 1st time home buyers. When I bought a 2/2, I was paying a 6-700 per month out of pocket after renting out 2nd bedroom. When you’re paying 500k for that same 2/2 and assuming same job (was making 70k-ish around time I bought), you’re paying at least 2x that out of pocket. Still not terrible compared to 2k for a 1 bed rental, but if that roommate moves out or you move and have to rent it out, I think you’d have a hard time breaking even, depending on HOAs. As others have mentioned, the benefits of the write-offs are decreasing and putting away even a 10% DP while sending $500+ per month to Student Loans is a tough task. No one wants to move in with mom and dad post college any more, so once you start shelling 1500+ per month on rent at 22, its harder and harder to stock $ away and buy. By the time you settle, have kids and $ to buy, its off to the burbs you go.
vb – I made clear my calculations of $1,900/m outlay was based on the hypothetical case of someone being able to pay cash for a $500,000 condo. Of course it would be considerably more if you had to get a mortgage!
But even if so, it’s less than your $4,300 estimate. If you compare apples to apples, you cannot count the principal that you pay back every month on a mortgage. That is just like putting money in a bank, you will get it back when you sell. It is only the interest payment of a mortgage payment that has to be part of the calculation to compare to rent (money you will never get back). And interest payments on mortgages are tax deductible. So, given that you would put 20% down on a $500,000 condo, your interest payment on a $400,000 4% loan would be $16,000/year, and after your tax refund, it would be $12,000. So add the $12,000 to the $7,000 property tax and the $700/m HOA and you get a monthly outlay of around $2,300. That’s still way lower than the $3,000 rent.
Oh, and someone commented earlier in this post the following:
“So you’ve got a bunch of folks who are making good money, maybe could buy, but tell themselves that they are responsible by renting the $4200 2/2 in a luxury building, maybe with a buddy or their significant other.”
Clearly, my estimate of $3,000/m for a 2/2 in a luxury building is WAY too low!
Okay, I’ll bite a bit as this is very relevant to me. My circle of friends and I are early 30s, ~six figures, and mostly met at a relatively luxury high rise in River North. For <$350K to stay in our preferred social neighborhoods and be able to walk to work/quick CTA to the Loop, etc. there are not many options. Either you pick between a very expensive new construction or a very old/worn place.
When rent is $2500 and you feel you have relative job security in Chicago, it does often make sense to buy… oh and that's IF you see yourself living there for 5 years (to make back closing costs, etc.). The problem is, many think they might have kids, so the window is short. Do you rent in RN for 3 years, then Old Town for 2 years and eventually go straight to a Lincoln Park 2BR or even the burbs? Or do you rent for 1-2 years in RN and then just buy for 5 years in RN before making the bigger move? The later might prove difficult without the bank of Dad.
I rented for 2 years in RN and bought a 900sqft 1BR for $345K in an extremely convenient location. Even with my HOA I'm still slightly ahead of the renters. It's also important to have a sense of HOME as well as know I can customize things to my liking knowing that I'll be there for longer than a year–over the last decade of my life I've moved about 10 times. It's nice to settle down a bit and the ownership serves as a status symbol too (you've got your shit together).
Some of my friends bought in the same building. Others are focusing on Old Town. A few think they will rent longer, get married, then move to the burbs. There's no RIGHT way to live your life and each are paying for the respective options which best fit their path. I really enjoy my location and could not imagine needed more than 900sqft for 1 person (at this stage in my life).
Lots of random thoughts:
First, that sounds similar to my thought process (and those of friends, married and not) in the late ’90s/early ’00s, Rob, which is refreshing.
My impression (maybe from too much Cribchatter or the wrong HHers) is that many young people today (same demographic as we were, as I was a biglaw associate in my late 20s, and jobwise so were most of my friends at the time, both in their 20s and 30s) aren’t interested in buying unless they get Wolf and Subzero, the most up to date finishes and styles, large 2/2 or 3/2, all the amenities. I was more flexible (or had different preferences) on location than you and just excited to get nice hardwood floors, a cool loft (IMO), and in house w/d — my first place was a 2/1 in the Southport area of south LV, and my friends tended to hang out in LV or LP (or sort of between there and downtown and I worked in the Loop, so easy).
It’s true we were lucky in that era — I bought a place for less than $200K that almost doubled in price in 5 years, giving me a huge downpayment (plus the fact my salary had increased) for the next place (3/2 in a good school district, which basically increased at the rate of inflation given the initial increase, drop during the bust, and then recovery since). I had a 15 y mortgage on that place, so it was mostly paid off when I sold it.
Re paying cash for a place being a good deal vs renting, I don’t think enough people see that as remotely a possibility that it’s relevant to the discussion. 20- or early 30-something renters back in the day certainly weren’t choosing that vs. renting vs. a mortgage (I think a lot of us paid 5 or 10%, but that that worked out even without holding long term was luck — a luxury of a market that did have unusual increases for a few years, or in some cases buying in the right place). I didn’t even get (and wouldn’t have wanted) a downpayment from my parents, which is why the easy lending (I started with 5%) was beneficial for me. Indeed, the assumed (and actual, for me) benefit of deducting mortgage interest was always understood as a reason to buy.
I do wonder how my (successful investment, but wanted because I loved it, it was an upgrade from my cheaper rental, and I wanted to own) 2/1 would do today, given that it was by no means fancy and had no amenities (Redfin estimates around $350sK today). Other friends bought houses to rehab in Roscoe Village (near the L, even!), or places in who knows where it is Graceland West (joking, I like the area now, a townhouse I looked at is way up), or quite small places in a variety of areas, and many did well, but many would have been considered inferior these days by many renters of the super luxury places (based on Cribchatter and my own sense of the market), so I get it. I don’t necessarily agree re the valuation on different things, but get it.
Re paying cash (which is the same as paying off), I am skeptical about that being a good investment, much as I love to own and prefer to have no debt. I could in theory pay off my current place, but believe that doing so would be a worse investment (given return on RE) that actually investing (keeping in investment) those funds, so long as it will be paid off by retirement. Am I crazy? I really think not.
The 500k condo paid in cash vs renting is an absurd example. Very few people in the typical 20-30 something 2br/2ba demo are going to have $500k cash to use. Yeah, parents might help, but not many are putting down multiple 6 figures for their kids all cash purchases (I’m aware it happens, it’s just not remotely the norm).
The bigger problem with this argument is that it ignores the opportunity cost of $500k. Conservatively, one should be able to earn 5-6% in the long term (or say 2-3% above inflation) by investing in the stock market. This “cost” would be an extra $2k+/mo or so that you would forgo by paying all cash. In the example above this would take $2,300/mo to $4,300+/mo, and this is on the conservative side.
Back to reality — I think the post about things swinging from one extreme (everyone buys) to another (renting is popular) is good. It is definitely trendy for city dwellers to rent and keep their options open + enjoy the lifestyle benefits. There’s such an incredible amount of new rental inventory in the hot neighborhoods.
I tend to think we’ll see continued lagging RE price growth in Chicago due to all the trends we’re all aware of — taxes eating into gains, massive supply increases, more demand for rentals, that eventually buying will become a better choice and you’ll see things go the other way once people figure it out (and/or there’s a major economic event that resets budgets and trends).
I understand I’m an outlier in my attitude about paying cash for a home versus getting a mortgage if you can at all swing it. Yes -comparing it to putting the money instead in a diversified portfolio averaging 4-5% long-term makes the net outlay of owning much closer to renting than my example of $1,900 versus $3,000-$4,000. The reason why I personally choose to use 2% as the lost opportunity calculator (versus 4-5%) is that I do not believe in investing 100% of my savings in the stock market.
For many friends I have who pride themselves on being educated and disciplined custodians of their savings, money has strangely lost its original identity as a Medium Of Exchange. Other than the psychic value of well-being at knowing that you have a certain dollar amount in investments in stocks and bonds, you get no actually benefit of this money until it is actually cashed out and traded for some tangible goods. Your portfolio could go up and down in value, but it is all just theoretical numbers until the day you actually cash out on the stocks. During the entire time that you are not cashing out, you are functionally the same as a miser – the benefit is purely the pleasure of knowing you have the money, not for anything real it is adding to your life.
So what are the alternative “benefits”? Once you cash out, you can use the money to buy a fancy sports car, a cellar full of fine wine, or a cruise around the world if that is what makes you happy. But you understand you are dissipating your net worth doing so. (“Squander” might be the word some would use.) Or you could go halfway in the Money As Medium Of Exchange attitude. Take your money out of investments that only exist as theoretical numbers and put it into something you can enjoy WHILE it is appreciating, or at least keeping its value. This is where putting your money in your house or condo comes in. The value of your house can go up and down the whole time you live there, but the values are theoretical, like stock values, until you sell. In the meantime, you have a place to live – something that has real personal value to you. By paying cash for a house, you are using money as a Medium of Exchange, but in a responsible way. A vast majority of items which you buy has 100% chance of decreasing or completely losing its value. Real Estate can, of course, lose its value, but over the long run (like a balanced stock portfolio), it has much higher likelihood of gaining in value. This is what makes real estate unique as an investment vehicle – it is something almost 100% of people seek and value for their quality of life, but it also can be a great investment.
My husband and I already have around 50% of our nest egg in a carefully diversified portfolio of equities. It has done very well for us – more than 7% average returns over the last 20 years. But I do not want to put more than 50% in “theoretical” money. If I get hit by a car next year and die, what will all this theoretical money have done for me? I want to be able to enjoy what at least some of our money can do for us NOW, without being irresponsible about it. So we put the rest of our money in real estate, and I also collect fine antiques. The value of much of my antiques has gone up considerably since I bought them, but others have gone down. But you know what? Even if they all devalue to zero, I will still have the beautiful antiques that I love and give me so much pleasure. They do not lose their value as soon as you buy them, like new furniture or cars or clothes – many things lose 50% of their value the instant they leave the showroom. If you lose even 5% in stocks when you sell, that amount you lost is the same as if you lost your wallet with the money in it. You never had a chance to trade it for some item of real value, so even the smallest loss feels like a big bummer.
The reason using the 2% as a Lost Opportunity calculator makes sense for me is that it applies only to money I do not want to put into our stocks/bonds investment portfolio. There is no other low risk place to park our money that makes more than 2% currently if I don’t want to increase my 50% exposure to equities. So I choose to keep my eye on opportunities in the real estate sector. I am not a professional real estate investor. I have only owned two rental properties at most at any given time, and the rental properties are always potential primary homes for us, just not at that particular moment. I always pay cash for the properties, and since the money would otherwise be just sitting in a money market account, that is why it makes sense for me to use the 2% calculator to check to see how much my outlay is for owning a particular condo unit. In one of my units I’m renting out currently, I bought the place for $355,000, put in about $20,000 to fix it up nicely, and have it rented out for $2,400/month. It is in a superbly run top building in the Gold Coast with low assessments (which is what attracted me to it), so my total monthly outlay (using the 2% calculator for Lost Opportunity) is only $1,350. So I’m making a profit of $1,050/month.
Another important point. if I take my total net rental income (minus assessments and property tax I have to pay) of $18,300 a year, this reflects a return of 4.8% on my original investment of $375,000. But I DON’T PAY ANY FED INCOME TAX ON THIS 4.8% RETURN! The reason why is that I depreciate the property. Along with being able to do tax deduction on the assessments and the property tax (because it is rental property), this effectively negates all the rental income I make, but only on paper. Of course, if I ever sell the condo, I have to pay back all the depreciation. But if I never sell the place, and it passes on to whoever inherits it from me, that person NEVER HAS TO PAY THE DEPRECIATION BACK!! In other words, if I never sell the place, I can think of the $375,000 I paid for the place as having bought an annuity that I’m getting 7.5% return on (which would be around 5% after taxes), except that unlike an annuity, I don’t lose the principal, but get to pass it on to my heirs. The only downside is that I have to be a landlord for the rest of my life, but this is why I would only do this for a unit in a top building that is managed well, with any future costs for me minor cosmetic updates of the interior.
This all has nothing to do with people in their 20’s trying to decide whether to buy or rent and having little likelihood of paying cash on a condo purchase. But I thought I would point out that if you were in the lucky situation of having enough money to invest, using it to pay cash for a condo is worthy of consideration if you’re not comfortable with putting its all in the stock market.
“If you compare apples to apples, you cannot count the principal that you pay back every month on a mortgage. That is just like putting money in a bank, you will get it back when you sell.”
not true at all, if your house declines in value or doesn’t appreciate enough in value that is just like flushing money down the toilet, and not putting it in a bank to get when you sell…
“not true at all, if your house declines in value or doesn’t appreciate enough in value that is just like flushing money down the toilet, and not putting it in a bank to get when you sell…”
That is true. But fortunately, that kind of scenario is unlikely to happen unless you have to sell way before you planned (assuming you bought with the expectation of staying at least several years). By “money in a bank”, I didn’t just mean putting it in a federally insured savings account, but any type of monetary account. So I suppose paying the principal portion of a mortgage is most like putting it in a mutual fund, with the risk of it being down in value when you have to sell. This is still not the same as the same amount being used for rent. There, you have 100% guarantee of never getting a penny back.
Paying your mortgage principal is like paying yourself the rate on the mortgage… the equity in the home is a fairly low risk forced savings for homeowners which is why historically homeownership has been an easy way to gain wealth for the middle class.
In comparing rent vs own, you really have to strip out the principle payments for apples to apples.
Regardless, I don’t think most buyers really put a lot of financial thought and theory into the decision. At it’s simplest level, it really boils down to I make X amount in income, I have Y amount for a down payment and can afford some payment. Factor in the intangibles such as lifestyle, kids, schools, etc and a decision is made.
“the equity in the home is a fairly low risk forced savings for homeowners which is why historically homeownership has been an easy way to gain wealth for the middle class.”
Exactly, a big financial “advantage” of owning for those who are not completely disciplined is forced savings.
Can some do a tl;dr on all the posts above? It’s a little much to get through.
I think the choice between putting down more (or all) cash versus a higher mortgage is to think of getting an essentially risk free return on the downpayment, where the rate is your after tax interest. Don’t think there’s really an alternative risk free investment with comparable returns, but of course you may not want such a large allocation to risk free. But if you have significant amounts in low risk assets, you’d have to think about whether you should pay down more of your mortgage (as long as you are otherwise okay liquidity wise).
“WTF?? Actual coffee, or just that dirty, sweet, milk in a bottle (or can) crap?”
I know you need the hand pour single estate from the mustachioed vest wearing hipster, but even the basic latte you’d get from an airline lounge type machine would not be bad.
“the basic latte you’d get from an airline lounge type machine”
Yes, adequate. Not a true ‘feature’ at $3+ psf.
And, in any event, apparently talking about a vending machine, not an airline lounge type machine. Presumably bc the latter would require too much attention.
“the benefit is purely the pleasure of knowing you have the money, not for anything real it is adding to your life.”
It’s savings for retirement for many or most people. And yes, I don’t think all one’s savings for retirement should be in the stock market (of course not), and I think one should plan to have a paid off house before one retires, but one is still going to need to have a place to live.
My dad and mom sold their place and bought another after retirement, but it wasn’t really part of their nest egg, since they had to pay to live somewhere (they did pay cash for the new place, which I think makes sense if you are retired). If you significantly downsize or move somewhere less expensive, then sure you get housing savings (maybe someday this will be me, who knows), but you cannot always count on that.
I think it makes sense to remain diversified, and part of that would be putting money into a variety of other investments and not just paying down principle as fast as possible and starting to make other investments only after that is done. And part of that would be starting to put money away for retirement ASAP, rather than waiting til one’s house is paid off. After all, it’s possible one won’t sell the house or be able to comfortably move into something cheaper easily, so thinking of one’s own home as mainly an investment (and something to forego other investments for to a major extent) seems like a bad idea to me.
Realistically, if one is young and has $500K in cash for a house and intends to use the savings in not paying a mortgage on investments, sure, but that’s very very few people, and many of those in that position would not want to limit themselves to a $500K home. If you are really rich, sure, could sense to pay cash for a house, but again this is hardly most people. It’s so non representative of the situation of the vast majority of buyers that it seems an odd thing to even debate. (Although it’s Cribchatter, so why not?)
Principal, not principle — argh. Wish you could correct things for even a tiny 5 minute window.
Stephanie – a tiny segment of young buyers have $500,000 to pay cash for a condo, that’s true. But I can imagine a scenario where they could do so. Many retired people who cannot risk keeping their nest egg in equities have been suffering for many years now from the low yields on no-risk savings account, which they count on for a good part of their living income. It seems to me that since mortgage rates are always (by definition) higher than what savings/mm accounts yield at any given time, that would be great incentive for retirees to lend the money instead to their grown children who want to buy a place and have them split the difference between savings account rates and mortgage rates. This would be a mutually beneficially arrangement, and there would be no need to go through the expense of applying for a mortgage. So under this arrangement, the Lost Opportunity calculator to determine net outlay currently would be 3% (halfway between 2% savings act rate and 4% mortgage rate).
I actually did the flip version of this with the very first condo I bought when I first entered the work force at the age of 24. Mortgage rates were 14% at the time!! (I’m revealing my age!) My parents were keeping a large amount of their nest egg money in low risk funds which were yielding what would seem like a whopping amount today – something like 10%. So instead of my getting a 14% mortgage, I borrowed the entire price of the condo – $100,000 – from my parents and paid them them 12% interest. (At the time, any interest paid was tax deductible, not just mortgage interest). Both my parents and I benefited from this arrangement – they made 2% more on their savings and I paid 2% less on my mortgage.
“Wish you could correct things for even a tiny 5 minute window”
You really were a bigly [that’s teh autocorrect for biglaw] associate. And forgo not forego, while we’re at it, which I would ordinarily never pick on (unless I think @fo would be amused), but you brought it up.
“I don’t think all one’s savings for retirement should be in the stock market”
Over a long run say 40 year horizon, why not? Why do people even hold bonds?
“And forgo not forego, while we’re at it, which I would ordinarily never pick on (unless I think @fo would be amused), but you brought it up.”
Oh, feel free. I think every one of my Cribchatter posts has at least one moronic typo/unnoticed misspelling/wrong word choice if not missing words. I’m not a great proofreader of my own writing to start and seem to be worse in a forum like this.
“I actually did the flip version of this with the very first condo I bought when I first entered the work force at the age of 24. Mortgage rates were 14% at the time!! (I’m revealing my age!) My parents were keeping a large amount of their nest egg money in low risk funds which were yielding what would seem like a whopping amount today – something like 10%. So instead of my getting a 14% mortgage, I borrowed the entire price of the condo – $100,000 – from my parents and paid them them 12% interest. (At the time, any interest paid was tax deductible, not just mortgage interest). Both my parents and I benefited from this arrangement – they made 2% more on their savings and I paid 2% less on my mortgage.”
That sounds like a cool arrangement (especially at the time).
Housing is now perceived as a marginal investment, with increased risks and diminished after tax returns. People are now choosing where to live based on unit/location and not evaluating it like buying a stock.
And no one with 500k cash buys a 500k house.
“I think we are due for another crash, but this time, not just in housing, but across industries, leading to a global depression.”
Why do you think this Jenny?
Depressions are caused by over investment and speculation. Is that what you are seeing in the US economy right now?
Also, depressions are rare. US hasn’t seen one in 90 years. Even a “great” recession is rare and likely a once in a lifetime event. With the last one happening just 10 years ago, there really hasn’t been time for the excesses to develop in the system again.
Just wondering why so many people (because Jenny is not alone) think some extreme event is about to happen.
“Just wondering why so many people (because Jenny is not alone) think some extreme event is about to happen.”
because people are depressed more than ever?
“Depressions are caused by over investment and speculation.”
——————————-
Depressions are also caused by external shocks to the system, such as trade wars, oil embargoes, wars, pestilence, and even disruptive technologies that render old business and political models obsolete.
Yes, there is eventually a new equilibrium, but the transition can be brutal, meaning a depression or severe recession.
“Depressions are also caused by external shocks to the system, such as trade wars, oil embargoes, wars, pestilence, and even disruptive technologies that render old business and political models obsolete.”
We’ve had all the things you describe in spades, other than the trade war, in the last 90 years and have never had a depression. You need over investment to get a depression or a severe recession. Neither exists right now.
Last I checked there aren’t strawberry pickers buying $700,000 houses (as was actually happening in California in 2007.)
“because people are depressed more than ever?”
Really? Why?
1. Stock market near all time highs.
2. Unemployment lowest in decades.
3. Botox.
4. Breakthroughs in surgeries using robots.
5. Cubs have won the World Series in the last decade.
6. You can fly non-stop to London for just $430.
What else am I missing?
“Last I checked there aren’t strawberry pickers buying $700,000 houses (as was actually happening in California in 2007.)”
——————-
No, there were never any strawberry pickers buying $700K houses in 2007 in California.
There were real estate agents and mortgage brokers (gee, was there a connection???) LYING about strawberry pickers having enough income to buy $700k houses — and telling the dubious buyers that it must be alright, or else the bankers wouldn’t have approved the loan).
Probably the same r.e. agents who say that Bucktown goes South of Armitage
“No, there were never any strawberry pickers buying $700K houses in 2007 in California.”
Nope. The strawberry pickers accepted responsibility. No one told them to buy the house. No one told them to lie about their income. And they weren’t the only ones. Plenty of liars out there 10 years ago.
Are they lying today? Nah. Not so much. People have already forgotten what true speculation looks like.
It is funny how history gets rewritten to match people’s preconceived notions. During the bubble, borrowers were absolutely willingly and knowingly lying about their income to get mortgages.
Stated income loans and the like were originally designed to streamline the process and namely for self-employed borrowers. However, there were always checks in place such as the IRS 4506-T, down payment requirements, and other checks to prevent fraud.
Banks started doing away with some of those checks and it invited a ton of fraud from speculators. Go look up Casey Serin of the iamfacingforeclosure.com blog. This guy was the poster child of the housing excess. Bought like 6 or 7 properties to flip, lied about his income, etc. There were tens of thousands of Casey Serins.
I recall looking into the foreclosure data when the bubble started to really deflate and like 50% of the foreclosures were investment properties. Only now are academics starting to admit this…
https://www.nber.org/papers/w23740
“Mounting evidence suggests that the notion that the 2007 crash happened because people with shoddy credit borrowed to buy houses they couldn’t afford is just plain wrong. The latest comes in a new NBER working paper arguing that it was wealthy or middle-class house-flipping speculators who blew up the bubble to cataclysmic proportions, and then wrecked local housing markets when they defaulted en masse.”
“Really? Why?”
social media, overuse of electronics, hormone inhibitors in our foods, debt, stagnant wages, all huge factors for our next home buying generation’s mental health
https://www.webmd.com/depression/news/20180511/depression-striking-more-young-people-than-ever#1
“New research shows there’s been a sharp spike in cases of major depression in the United States in recent years, especially among teens and millennials.
The Blue Cross Blue Shield Association analysis of medical claims data showed that the overall rate of major depression was 4.4 percent and that diagnosis rates rose 33 percent between 2013 and 2016. Those rates increased 63 percent among teens and 47 percent among millennials.”
“Go look up Casey Serin of the iamfacingforeclosure.com blog. This guy was the poster child of the housing excess. Bought like 6 or 7 properties to flip, lied about his income, etc. There were tens of thousands of Casey Serins.”
——————–
I remember reading about him and read his web site before it was taken over by some other site. Trouble is, people forget that the r.e. agents and mortgage brokers were lying and falsifying information on applications “on behalf of” the “strawberry-picking” applicants.
People talk of black swan events, but the black swans were the economic forces, it was the nannies, hairdressers, strawberry pickers, and what-have-you who were being alleged to have six figure incomes and could therefore afford such a house. Are there nannies who make six figures? Yes, a rare few, catering to the wealthy, and mostly in New York City. They could meet in a phone booth.
So the only reason why those other nannies, etc. could have their applications (no doubt filled out by r.e. agents and mtg. brokers) approved is because the lenders were deliberately looking the other way. Forget “no doc” loans. These were lenders and brokers engaging in fraud simply to pocket commissions.
Was there speculator fraud? Absolutely. The ranks of speculators, though, has to include the banksters and others who speculated that the rise in house prices would continue and bail them out. The fact that middle class speculators were buying investment properties does not alter that fact.
“but the black swans were the economic forces”
Should read: “but the black swans were NOT the economic forces…”
When fraud schemes have their own acronyms, you know it’s going to turn out badly:
-SISA (stated income-stated asset) loan application allows the borrower to declare their income without verification by the lender. ”
-NINJA loan is a loan extended to a borrower with “no income, no job and no assets.”
“New research shows there’s been a sharp spike in cases of major depression in the United States in recent years, especially among teens and millennials.”
Not down playing mental illness but it increasing due to those generations being worthless and weak. They have faced no adversity they either were allowed to or were able to overcome.
Its what happens when your entire life is a participation trophy
“Its what happens when your entire life is a participation trophy”
————————
Harsh and unwarranted. Their financial prospects are bleak. Not much to look forward to.
“They have faced no adversity they either were allowed to or were able to overcome.”
Every generation complains about the one before. It’s so cliché!
While some Millennials have certainly been pampered, it’s not correct that they haven’t faced any adversity.
Did you graduate high school or college into an economy with a 10%+ unemployment rate, crashing housing and stock markets and big student debt?
Have you fought in the longest war in US history?
That would be the older Millennials.
Baby Boomers have to be one of the most spoiled generations ever. They were given everything and are still whining about how awful things are.
“During the bubble, borrowers were absolutely willingly and knowingly lying about their income to get mortgages.”
Yes. This is what I said. No one is disputing that there were lies. Everyone was lying. That’s why strawberry pickers were buying $700,000 homes. But it was supposed to be a “new paradigm.” That’s why it’s absurd to say we’re in another bubble right now. It’s not even close. In fact, I’ll go the opposite direction and say we’re in the “anti-bubble.” Try getting a loan now. It’s very difficult even for those with good credit. And that’s how it should be.
How quickly people forget. Go read The Greatest Trade again everyone.
The strawberry picker buying, by the way, is a true story from California during the boom.
“While some Millennials have certainly been pampered, it’s not correct that they haven’t faced any adversity.
Did you graduate high school or college into an economy with a 10%+ unemployment rate, crashing housing and stock markets and big student debt?”
Ripped from the headlines: Crashing housing and stock markets – Millennial hurt worst LOFL
The job market when I graduated wasn’t rosy, Unemployment was in the mid 7’s and there were plenty of job offers pulled. Student debt is a decision, and many chose poorly.
for many Millennials, they have had the job market/corporate structure tailored to them at an early point in their careers, low interest rates, a huge bull market (As participants)
“Have you fought in the longest war in US history?”
That would be the older Millennials.”
No and not sure what this is supposed to imply. Are you trying to say that all or a majority of Millennials we’re in the military? That GenX had no part in the war(s)? or something else?
“Baby Boomers have to be one of the most spoiled generations ever. They were given everything and are still whining about how awful things are.”
No argument, but not sure how that has any bearing on my comment other than they’re somewhat responsible for creating the environment in which Millennial developed
uh the baby boomers had to worry about getting fucking drafted to go to ‘Nam, and the early 70’s shit ass economy… there is nothing even close the Millenials have had to deal with compared to that.. and trust me I’m not a big fan of their generation, but come on…
On a lighter note, here’s an article in the Economist about rent control in California:
https://www.economist.com/united-states/2018/11/03/rent-control-is-a-hot-button-issue-in-california-again
Note that people earning $350,000 a year benefited as much as minimum wage workers
“uh the baby boomers had to worry about getting fucking drafted to go to ‘Nam, and the early 70’s shit ass economy”
Sonies, he said that the Millennials have never faced adversity which isn’t true. I didn’t say that they had it harder than the Baby Boomers. That’s why comparing the generations is stupid. Each faces different challenges.
It’s a lie. The early 1970s economy didn’t even come close to the damage of the Great Recession. Not. Even. Close. And the Boomers weren’t in it with thousands of college debt. In fact, they weren’t in the 1970s with any debt at all.
Sure, there was Vietnam for some of that generation (the men, not the women.) But plenty of Millennials actively enlisted in what is now the longest war in US history and thousands died. So, again, to say they haven’t faced any adversity is a lie.
“Unemployment was in the mid 7’s and there were plenty of job offers pulled.”
So you graduated just a few years ago then? Because before the Great Recession, it had been a long time since we had 7% unemployment. Probably around the 1990 recession. Yawn. And 7% unemployment isn’t 12% with 8 million people laid off ahead of you.
Whine, whine, whine. I’m so sick of it. Yes, the Millennials have faced adversity. Quit the whining about how hard “your” generation was. Each has its own issues. I could go back to my great grandparents and how they all worked on the farm downstate and the “adversity” of it. Lol.
We are in the midst of the longest war in US history. I never said GenX wasn’t impacted. But it was Millennials who enlisted and were sent in big numbers. 16 years ago the oldest Millennials would have been 22. So, yes, this war has fallen heavily on their shoulders (and, CONTINUES to.)
“In fact, I’ll go the opposite direction and say we’re in the “anti-bubble.” Try getting a loan now. It’s very difficult even for those with good credit. And that’s how it should be.”
It’s not at all hard to get a loan now. It was for a while, but times have changed. I was condo president during the bad times and after, and back in the day banks wanted way more than they do now, you could really see how standards got tougher and then relaxed. This year I bought my new place while owning my old one, and the banks were cool with that, which would not have been the case if lending standards were tough.
“So you graduated just a few years ago then? Because before the Great Recession, it had been a long time since we had 7% unemployment. Probably around the 1990 recession. Yawn. And 7% unemployment isn’t 12% with 8 million people laid off ahead of you.”
No to the first. Are you claiming that unemployment was at 12% for Millennial’s, or are you making things up again?
“Whine, whine, whine. I’m so sick of it. Yes, the Millennials have faced adversity. Quit the whining about how hard “your” generation was. Each has its own issues. I could go back to my great grandparents and how they all worked on the farm downstate and the “adversity” of it. Lol.”
The only whining I see is your blind devotion to the incorrect thought that Millennial have it soooo tough.
“We are in the midst of the longest war in US history. I never said GenX wasn’t impacted. But it was Millennials who enlisted and were sent in big numbers. 16 years ago the oldest Millennials would have been 22. So, yes, this war has fallen heavily on their shoulders (and, CONTINUES to.)”
Quit acting like every millennial is Sal Gunta, Combat has affected probably less than 2% of the generation (And before you misrepresent my statement like you are wont to do), I’m not down playing their sacrifice, rather its outlier not the norm. The majority of the generation is more concerned about the Instagram status.
Are you a Helicopter parent?
“Are you claiming that unemployment was at 12% for Millennial’s, or are you making things up again?”
No- the country’s unemployment was 12%. We have no idea what “millennials” was but it would depend on if they had a college degree or not, of course.
“The majority of the generation is more concerned about the Instagram status.”
No. That would be GenZ really. 35 year olds didn’t grow up with Instagram as a way of communicating in grade school. Most aren’t obsessed with it. That began with GenZ. There are some younger Millennials who are probably obsessed but are the 23 year olds the “majority of the generation”? Doubtful.
I really recommend everyone see the movie “8th Grade.” You can stream it now. It’s the best movie of the year and a real eye opener about what the kids today have to deal with growing up with social media.
Those poor souls. It’s awful.
People need to get over their obsession with the Millenials (as a way of describing all young people.) They’re not young anymore. Gasp! I know. Time passes. The youngest are 20 but the oldest are now 38. They are a force, however, because they’re the largest generation in history. They will really boost the economy when they reach peak wages in about 20 years.
“It’s not at all hard to get a loan now.”
That hasn’t been my experience, or the people I know, at all. Still really difficult even in the last year thanks to the changes in the regulations. They check everything. They check the missed credit card bill from 1991.
You can still buy with no money down, but you’ll pay the price for it with PMI and, in some cases, a special charge.
It’s self-selecting now. People without the higher credit scores don’t even apply to get the mortgage.
“The only whining I see is your blind devotion to the incorrect thought that Millennial have it soooo tough.”
I never said they have it so tough. You were the one who said they never faced adversity. Of course they have. They are the first generation in a 100 years to enter into adulthood in the middle of a severe economic crisis. And, no, graduating with unemployment at 7% doesn’t count (that’s a laughable comparison.)
I’m tired of the Millennials getting beat up all the time. It’s dumb because each generation faces their own challenges.
“It’s self-selecting now. People without the higher credit scores don’t even apply to get the mortgage.”
——————-
Well, in that case, what ARE they applying for? Cuz if they are low score and not applying, they aren’t cribchatter custom.
“the country’s unemployment was 12%”
Peaked at 10%. And for the over-20 measure, peaked at 9.3%.
Comparable for early-90s was 7.8 and 6.9.
“They are the first generation in a 100 years to enter into adulthood in the middle of a severe economic crisis.”
The 38 year olds entered into adulthood in 2009???
So, millennials don’t become adults until they are almost 30?????
Or are you referring to sub-cohorts when it suits you, and pillorying others for doing the same when it suits you?????