Rent Versus Own Dilemma: 130 N. Garland
Should you buy or should you rent?
That’s the question a buyer would have to ask about a three bedroom unit in The Heritage, at 130 N. Garland in the Loop.
This is a west facing, high floor unit (so no lake views.) These are the city views:
Unit #5202: 3 bedrooms, 2 baths, 1700 square feet, west facing
- Sold in December 2005 for $829,500
- Currently listed for $950,000 (includes the parking)
- Taxes of $10,093 a year
- Assessment of $768 a month
- Rubloff has the listing
OR
You can rent it for:
- $3750 a month (includes one parking spot)
- Rubloff has the rental listing
How much of a deal is the rental?
I plugged in the numbers into the New York Times Rent v. Own calculator (linked to on the site.)
I put 10% down as a downpayment and used 6.25% as the mortgage rate. That gives you a monthly mortgage payment of $5264.
I put the tax rate at 1.07% of the purchase price which approximates the actual taxes. I used the advance features to include the HOA.
Conclusion:
A buyer should NEVER buy this unit.
It is better to rent for the next 30 YEARS than to buy this unit (with 2% annual appreciation in housing costs and 4% annual appreciation in rents.)
Is this unit a rental deal?
Even with a 10% downpayment, it is nearly 50% cheaper to rent it per month than to own it.
This means that it is priced nearly twice what it needs to be to be rent-parity.
We have a long way to drop on prices.
I agree. This is something sellers, including banks don’t realize. Everything I look at is way over priced, even on the low end.
I think the rent vs own comparison gets more skewed to renting especially in the higher end markets. I think the main reason is that of the people who can afford to buy this property, the proportion that rent is very low, most would rather own. So you have a very low supply of renters who look in this market but you are going to see a glut of these non-descript 800k-1.2M units that will rent for much less. When you look at the low end of the market there are always people looking to rent a 1 bedroom for $1200-$1400 and the proportion of people who make between 40-70K who own would be significantly much less than the proportion of people who make over 300K.
When you start getting at these higher end units, people who can afford to buy them want stability and the ability to customize and live in the same place for years. When you rent you don’t know if the owner is going to sell next year, is no longer going to make it a rental, going to get foreclosed on. Why would I as a high end renter spend 50-100K to properly furnish the apartment if I am not certain. When you look at the tax braket for most of the people looking to buy and the interest and property tax deduction it comes down to about propbably $1500 a month difference and many people in that braket may not think thats is too much to pay for convenience and stability.
I personally would just rent the unit but I’m not in that position to throw around that kind of money where I could lose $1500/month
Excellent insights, Condo Investor.
Looking at it from a current yield perspective, it yields about 2.7% from gross rent less HOA+tax. Two variables not included were homeowners insurance which could lower this or that the purchaser gets to deduct the mortgage interest which could up this.
Sure 2.7% is about 3% lower than any 30-year mortgage you could get but we should also consider that there is a market for paying cash for properties and its mostly the upper end. And 2.7% isn’t a bad yield these days for idle money.
50% cheaper to rent??? Let’s us take a closer look. Let’s buy it at $900k and put down 20%. A $720,000 loan at 6.25% is $3,750 per month in interest expense. Add in monthly taxes and assessments of $833 and $768, respectively and you have a monthly housing expense of $5,351. Subtract out the potential income tax savings (30% top tax tier) of $1,174 (monthly) and you have a total monthly housing expense of $4,177. Rent for $3,750 or buy for $4,177 per month. I would never buy in a high rise building but this particular area of the Loop is doing great. The park has changed this area for good and the Hermitage has protected views (at least on the east side).
If you are going to compare rent vs. buy you really need to do it correctly. (My numbers are back of the napkin approach but pretty close)
You’ve left out some very important variables, Dan, the most important being the opportunity costs of the down payment (in addition to the opportunity costs of subsequent payments made that you can’t then invest in a vehicle–like a stock market index mutual fund–that pays far more than the 4% per year you can expect as appreciation on your principal). Other things you have to pay as an owner that you don’t have to pay as a renter–insurance on the value of the unit against fire/other damage, maintenance/updating of the unit, and the costs (commission, closing) of buying/selling your unit.
This is why a calculator, like the one Sabrina links to, makes more sense than a back-of-the-envelope calculation. It’s still going to be an estimate–but it at least doesn’t leave out the above (large) costs of ownership.
Kenworthy
Your return on your pricipal in housing is leveraged. So if housing over the next 15 years averages 3% per year, in reality because you only put 10% as a down payment your leveraged return is about 30%. That is why in the NY Times calculator you see that the onger you hold the place the more the more profitable it becomes. While in the stock market the best returns (over 40yr avg) are usually for sm cap value stocks in the 12% range.
You are right about the opportunity cost of the added expenses in the first 5 years but a few thousand dollars a year for 5 years doesn’t change the long term (i.e 10 plus years) benefits of owning.
Kenworthey,
Something else to consider, as a counterpoint, is that in a condo purchase you won’t pay a capital gains (or dividends for that matter) tax on housing appreciation, whereas obviously you would with most other investments such as stocks/funds/etc.
However, I’d be impressed if Dan could land a jumbo mortgage ($720k) for only 6.25%…. maybe a mortgage broker could chime in, but I’m under the impression jumbos in the Chicago area are more in the 7 – 7.5% range.
I like how you are assuming the stock market will produce a return but housing will remain flat. If housing tanks you will have to trust me that the stock market will follow. It all comes down to buying a home at the right price. That price WILL ALLWAYS be at a premium when compared to monthly rental prices but it should be at a premium.
If you know finances and the market, purchases a property does not have any closing costs. You have to know what you are doing but many pay no closing costs at all. I leave all closing costs out of my equation (and obviously commissions) because I do not have to pay them.
The 30 year fixed for a Jumbo is in the 7’s. ARMS are the only way to go for Jumbos right now. They are close to 6% for a 5/1 or 6.25% for a 7/1. Hopefully congress cooperates and raises the Fannie / Freddie limit soon.
CondoInvester and David–yes, good points. Ever more reason to use a calculator than back-of-the-envelope, which you are bound to screw up.
Dan–who has assumed housing remains flat? My assumption was explicitly that it would appreciate at 4%–the historic norm. And I “will have to trust [you]”? Why is that, again?
“A $720,000 loan at 6.25% is $3,750 per month in interest expense.”
My math puts a $720k loan @ 6.25% at $4883/month.
So you are assumming a $36,000 return on the $180k down payment (4% annual appreciation). That would make your net housing payment a little over $1,000. I guess there is no comparison then, right? Why would you rent if you are assuming a 4% appreciation rate? It is not even close when you break it down.
Please advise?
Chicago Bubble – Your math is bubbly!
Property appreciates (on avg. over the long term) at 4% a year. The stock market appreciates (on avg. over the long term) at 10% a year. If you put $180,000 down, the total value of your property appreciates at 4% per year. (The less you put down, the better off you are, for the reason CondoInvester pointed out.) If instead you put it into the stock market, you’d be getting 10% per year on that investment.
It’s complicated; there are a lot of moving parts. Use a calculator.
Appreciate from what level? If everything is over-priced, it has to drop first, then begin to appreciate from the point the market resets at. Am I wrong?
One of the units I am looking at is a 2br/2ba condo. It sold in 2004 for $188,000.00. Appranently, the buyers had to take out an addittional $30K to do the finishes themselves. (It also looks like a mortgage scam)
Well, the owner finally walked away, and the bank took a judgment for $262,000.00. The bank eveuntually bought it the judicial sale for $299K. Now it is on the market for $230 K. Of course, the old owner took all the appliances, and even the handles off of the kitchen cabinets, so I would have to fix. (I enjoy it.)
I can’t see how the value of the place will increase four percent a year from the $230K price tag. Maybe from $188K? I am not a finance guy, I’m a lawyer. Maybe I am way off. Someone told me that 2003 prices are the rule of thumb.
Just seems that the hardest part is determining the right price. (Don’t want to be catching any knives.) I sure don’t feel sorry for the bank. Someone told me that 2003 prices are the rule of thumb.
Another way to look at it is using the housing being 30% of your gross income rule of thumb. At $3750 to rent you’d have to make $12500/month or $150,000/year to afford the rental. But that same person making $150,000/year would be buying the other unit at more than six times their yearly income if they bought for $900,000. If they put 20% down and got a 6.25% my math comes to $6484/month with principal, interest, taxes and HOA’s. That’s 52% of their monthly income.
Kenworthey – I was being sacastic with my “please advise”. My calcs are right and I do not need a calculator.
10% annual return on the stock market? So we should be at 600,000 on the dow in 2050? The real return on the stock market is more like 5 – 6%
Chicago Bubble – Principal is not part of any relevant financial analysis. It is like asking how much you are going to put into your savings account each month. It is not part of the analysis.
Dan, you should quit while you’re behind.
My bad I did make an error but my original math is closer than yours Dan. Your principal & interest would be $4433/month which is directly from the Freddie Mac calculator.
So with taxes and HOA’s that would put one’s monthly layout at over 48% compared to 30% for the rental based on a $150,000/year income.
You sound pretty advanced Kenworthey. What do you do for a living?
Yeah, because housing only goes up.
Dan, if one was setting a budget and did factor in how much they were putting into savings each month they wouldn’t be able to balance their budget.
Not to mention the fact that there is a huge difference between principal paid toward a home and money put into a savings account. A savings account is easily accessed by walking up to a teller or using an ATM card. It’s not easy to pull money from one’s home even though many treated their homes like ATM’s over the past several years.
Then do a interest only loan? what is the difference?
“Dan, if one was setting a budget and did factor in how much they were putting into savings…”
Sorry, meant to say didn’t factor.
Interest only? Not sure. But one would be pretty dumb to do an interest only loan a a nearly million dollar condo unit unless they a VERY shroud RE investor…which I’m sure you will now tell me you are.
CB – My point is when comparing a buy vs rent spreadsheet do not include principal paid on your loan. Comparing cash flows is another story.
CB – I will ask you again, what is the difference between a fully amortizing and an interest only loan? How is one more risky then the other?
When doing an analysis on properties especially commercial propertires, your debt reduction (principal payment) is considered part of your return or gains and not an expense. To consider it a cost/expense is inaccurate.
If you want to access your capiital in real estate, you can get a line of credit and it works like an ATM. I always recommend an interest only mortgage because it gives the owner the option to pay down their mortgage.
Well said condo investor!
“when comparing a buy vs rent spreadsheet do not include principal paid on your loan”
That may be true in a normal RE market but we are not in a normal RE market and losing one’s principal paid on a loan due to price depreciation is a very real possibility. It would not be wise to discount that. It’s in part how we got in this situation to begin with.
But you can always pay it down voluntarily. Right? Still wonderign what I should offer on that place.
CB – You just don’t get it. I give up!
I have thoroughly researched several markets and choose to rent a brand new condo professionally furnished and outfitted right on the beach in North Miami Beach for 1/2 the price of ownership (not even accounting for the decline in prices to come). There is a premium to owning … my guess is 10% but could be anywhere from 0%-20% premium that you pay to own versus rent. So, owning usually costs more. Many people use a 160 multiplier on rents to come up with the price and investors like to buy at a 120 multiplier. The point is, in this market renting is the thing to do for sure UNLESS you are going to live there 10 years+ and can buy at a good price with a low interest rate (under 6%). Otherwise rent rent rent. I have never understood people that rent out homes at loses…unless you must buy now and plan to retire there later. Otherwise you’re just subsidizing the housing of your renters and are incurring some pretty good opportunity costs. If can rent a $1M place for under $4K/month then that is a pretty darn good deal in my opinion.
Cheers from sunny Florida!
J – Yes you can always pay it down. How much to offer? do the analysis on what it is worth. If you don’t know how then you should find a broker that can do it for you.
If I lived in miami I would rent to.
The deals on the beach with beautiful direct ocean views are incredible (as long as the owner doesn’t go bankrupt!). They just want taxes and HOA fees paid for. I almost rented a $1.75M place for $4K but didn’t want to have to furnish it! I am renting for less than in Chicago, have a larger place, better weather, great locations, very safe, etc….. Chicago is not a bubble market but prices did inflate above the fundamentals so it will decline a bit or hold steady for a loooong time. The rental deals are out there…..
Well, I just rolled the magic 8 ball that my boss gave me for Christmas, asked if I should buy, and it answred definitely. So I guess this whole debate is moot. 😉
There is a major disconnect form what you two are speaking of and what most people come to this site and others like it for. Most people just want to buy a HOME. You two are speaking about investing, interest only mortgages, equity lines of credit etc.
Once again, those are things that got us in the situation we are in. If you two want to invest in a condo(s) be my guest but most people who are in the market are best suited sticking with standard product like 30 year fixed and need to know their monthly layouts INCLUDING principal. And when those buyers see large spreads between the rental rate and their monthly mortgage layout they are best advised to continue shopping.
Well put.
Agreed. I couldn’t care less about the economics of an interest only loan; I’m interested in paying off my debt. I suspect that most of us are not visiting this site to get into the lucrative speculation market of 2008.
Also, at the risk of inviting another of his thrilling posts, Dan says “You have to know what you are doing but many pay no closing costs at all. I leave all closing costs out of my equation (and obviously commissions) because I do not have to pay them.” Did he finally admit that his profession is an unnecessary part of the homebuying process?
sorry to bring this up now that the dust has cleared up a bit on this page but, im genuinely curious (and too lazy to do the math myself):
Dan, assuming the jumbo loan of $720k @ 6.25% (interest only arm?) with the buyer living in the unit in his/her first or second home in the 30% tax bracket. are you saying that the MONTHLY tax break that person can expect is $1,174? is that true? if so i need to get out of my mortgage and get myself into a jumbo loan.
Bubble Blog
For over 99% of the homeowners, it will be the single largest purchase they make in their lifetime. I’m pretty sure people want to make sure that they do the right thing financially. Explaining what your martgage is made up of (Prinipal and interest) is not a complex idea and if people took the time to understand this in the first place we would not have as large of a credit problem as we do today. Also understanding a simple financial statement is not as complex as you make it out to be. I think the people on this board are very savvy and smart.
I think people need to understand that the spread that they see between rent vs owning is not as large and as simple as you make it out to be and that they should find someone who know what they are doing to help them out. For a prospective homeowner to spend a fee hundred dollars and get honest advice from a CPA is proably the best money spent. While some realtors are decent with their finances, most are incompetent with simple financial analysis and are bit biased.
There is no doubt that renting this particular unit at the Heritage at $3750 is better than buying it for $950,000, putting the traditional 20% down and taking out the usual jumbo loan out on a 30 year fixed mortgage. But Dan and Condo Investor are right about nearly everything else when comparing renting and owning. Assuming your “opportunity costs” when considering the equity held in your home are going to be anything more than what you could get in a money market isnt an assumption I would be willing to make, and thinking you could get 10% per year is on that money is nuts. The reality is that nobody takes money that they would have otherwise put into a down payment and puts that same money in the stock market for the 30 years and sees what happens. You could lose that money in the market just as easily as make money. That is why you diversify, and one of your asset classes is real estate…for most people, that means investing in their home through equity in that home. I dont think anyone here is suggesting that someone should take the only extra money they have and throw it into their house. Part of your money is in your home, and some is in stocks, bonds, commodities, private equity, life insurance, and whatever else you believe in. Deciding whether to rent or own is more complicated than plugging a few numbers into a calculator and letting a machine tell you what to do.
Well, it doesn’t hurt to make an offer. Just got my realtor to make an offer on that foreclosure. $80K below asking price. Why not?
I think I made my realtor mad….. 😉
Pete,
Not only do people do this, but *I* do this. I currently live in a small co-op unit, well below my means. I have a very large nest egg that is in an index fund in the stock market. If I were to buy a bigger place in a better location (which I won’t do until I’m more confident than I am now that prices won’t continue to fall), I would still *not* put more than maybe 10% into a down payment. Why? Because the stock market historically has paid 10% per year over time; homes have appreciated at 4%. By keeping my money in the stock market, I net 8 1/2% over time (10% gain minus 15% capital gains tax on the gains), and as CondoInvestor points out, I get 4% appreciation on the full value of the house. True, I pay about 6% in interest on the money I’ve borrowed for that house, but I get 30% of that back as a deduction.
There are many more moving parts than just these. If I’m trying to decide whether to buy or rent, it’s a very complicated question. To NOT avail yourself of the financial calculators out there, and to treat it like it is a simple question (as Dan “the Man” treats it), is misguided. Right now, given how low rents are compared to most asking prices, the sensible thing to do is to rent. If, however, you’ve found a place that bucks the trend and you can buy it for a more reasonable price, the sensible thing to do is buy.
Also, Pete, by putting it into an index fund, you are very diversified. Of course you can still lose money. You can in real estate, too.
I’m surprised nobody mentioned the unpredictability of rent? In the late 90s and early 00s when interest rates were high, I recall rents being extraordinarily high as well. Fast forward to 2002 with a 30-year fixed at 4%, and there seemed to be a lot more rental incentives out there.
It seems like people are willing to pay a premium to lock in their housing costs (ignoring taxes & assessment) for the next 30 years.
Lets see if someone puts down 20%, that is 180K. Which would yield 9K a year at 5%. That comes out to roughly the $768 month assessments. Owwww.
And there will be _no_ appreciation (unless there is massive inflation) for years.
I think that it’s hard to do these calculations on the back of an envelope. You have to take into account annual increases in rent, which is not easily done without a spreadsheet.
I think that many of you haven’t taken into account the leveraged appreciation. As one of you mentioned, 10% down that is leveraged 10 times and appreciates at 3% per year is likely to be better than taking that 10% DP and putting it into an index fund if you only have a 10 year time period. It all depends on your time horizon, though. It would take 27 years for the DP at 10% per year to catch the appreciation of the leveraged DP at 3%, net of what you borrowed.
For example, if you took $10,000 and invested it at 10% per year, you’d have about $26,000 after 10 years. If you took that same $10,000 and leveraged it to $100,000 and it grew at 3%, it would be worth $135k after 10 years. Pay back the $90k you borrowed and you net $45k vs only $26k. You would have to take the payments on the loan into account too, but you see my point.
Think of it this way. After taking everything into account, including the mortgage, assessments, insurance, taxes, etc you may pay an extra $1000 per month on a mortgage vs. renting. However, if your $500,000 condo oes up 3% that year, your net worth increases $15,000 vs the extra $12,000 you paid over the year and you come out ahead. It comes down to whether you want to focus on net worth vs. cash flow.
D
We could all be dead tomorrow.
I think its hysterical that people are forecasting gains in real estate over the next ten years. Growing supply, diminishing demand, rates increasing (to offset inflation) and mortgage products decreasing. Keep in mind that the housing supply does NOT include units held by investors.
After its all said and done, appreciation wont even hit 3% for the entire decade after the drop in prices we will see over the next couple of years.
I really am still laughing as I type this out.
Seriously, AD, that’s the point that STILL hasn’t hit home with most real estate owners. This “slump” does not mean that appreciation will settle down to its historical 3-4% mean, it most likely means that the entire pricing structure will have to settle back to a 3-4% mean, which probably will entail substantial reductions in prices.
I realize that that’s old news to most of the readers of this blog, but I remain amazed at the prevailing attitude of most sellers that they can still ask for more than they paid in 2005-2006. Yes, there are still some buyers who will pay that, but they are going to become few and far between very soon. 3-4% apprecation is going to seem REALLY good in the not-too-distant future.
Barring foreclosure from my landlord (which may not be far away, but that’s a different story), I’m going to continue to rent for at least another year.
Do I have to show you guys what $950,000 will fetch you in Naperville?? HAHA j/k j/k 🙂
In the mid-1980s, according to a long-time agent who was working at the time, some of the western suburbs saw about six years where prices never went up.
I’m assuming it wasn’t much different in the city during those years.
Kenworthy – I have no doubt your system works for you and that you take great care to evaluate all your options when deciding what your living space should be.I dont consider an index fund to be diversified, because you are only diversified within one assett class. And the which part of the stock market has returned 10% and over what period of time? You may pick the wrong “period” to chose stocks as your investment vehicle and that 10% figure is meaningless (particularly taking into account fees and taxes which can wipe 3 points, at least, from your “gains”. Real estate should be part of any diversified protfolio, which includes more than just stock or a stock index fund. It should include commodities, indexes of commodities bonds of different types, equities of different types, etc. And having your real estate portion of your protfolio tied up in your house then is not an opportunity cost at all, because it is a part of your overall assett allocation. Anyway, it is interesting to hear different perspectives here, and I respect all of them. Its a complicated business, as Kenworthy says, with many moving parts. Oh, Waterview just got their 300 million construction loan today, so we will see how that goes now.
Over the term of a 30 year mortgage, the stock market has walloped residential home appreciation, even accounting for the deductibility of interest payments. It isn’t even a contest. A broad based ETF index fund like VTI is completely diversified in U.S. equities. Equities, a home, and cash (10-20% of NW) really is all you need unless you go into business yourself. No need for bonds.
It really isn’t a contest, equities are a much better investment over the long term. Homes are shelter, not investments but hedges against inflation and a preservation of wealth (a forced savings that in the past you couldn’t cash out easily). Remember, equities are ownership in businesses that generate earnings and profits….homes don’t do that, 30 years later it is the same house, 30 years later companies grow and grow and grow. It is like when people bought tech stocks not based on earnings…a mistake and that bubble burst. Same with homes, if you buy one banking on appreciation you will be sorry, esp. if you borrow against it with that mentality,
I have made millions in real estate. Land development and construction is where money is made in real estate, not from holding a stagnate home (even if you do pergo, granite, and stainless steal remodels).
Pete,
A healthy portfolio should not include diversifying into weak assets (i.e real estate, retail stocks, etc), unless its overseas real estate of course. Anyway, the point is Real Estate should not be an investment in anybody’s mind right now. Its ok to buy with the expectation of acquiring a home, but to expect a return on such purchase is absolutely ludicrous after considering the current market fundamentals.
I am a consultant who analyzes real estate from the buy/sell/lend in all asset classes including residential. Just wait until the Commercial sector dominoes start to fall. You ain’t seen nothing yet!
Also keep in mind that we are currently in a closet-case recession, when it becomes national news, who is going to buy after consumer confidence is absolutely crushed??? This is going to kill what little demand we already see for residential real estate.
Last point I’ll make on this, just to defend index funds. 🙂 Yes, it is one ‘asset class’–but an index fund mimics the entire market. Every sector is covered. The 10% figure (just like the 4% real estate figure) assumes you are buying and holding for a looooooong time, like 20 years. In that case, timing entry isn’t as important (not unimportant, just less important. You don’t want to buy if you are very confident prices are going down–like most housing units on the market in Chicago are). Finally, taxes and fees aren’t even close to 3% in an index fund. I’ve already accounted for the 1.5% taxes. Fees in an index fund shouldn’t be more than 2/10ths of a percent.
dan the man, if you are comparing rent vs own, you must assume 0% down interest only to make it an apples for apples analysis. mortgage includes principal payments and why would you include equity when making a comparison to renting.
“If you took that same $10,000 and leveraged it to $100,000 and it grew at 3%, it would be worth $135k after 10 years. Pay back the $90k you borrowed and you net $45k vs only $26k.”
That is so grossly flawed I can’t even begin to explain. That $90,000 you’re paying back is only the pricipal. What about the interest you paid? What about the taxes you paid? What about any assements you paid? Count those against your profit and that $45,000 disappears in a heart beat.
People always just look at the price they bought the house at and what they sold it at to dtermine their “profit”. You have to factor every cost associated with that home. Not factoring those in gives one a false impression of profit made just like you did.
Kenworthey,
Great advice on minimizing the expense ratio as you can get them for as low as 18bps, but you should know that the S&P500 is not fully diversified. Its large-cap stocks and it’s value-weighted so you’re overweighted on the largest large-caps, I read somewhere if you put $100 into an S&P500 index fund over $4 of that is one stock alone (Intel).
Truly diversified equity index funds mimic the Wilshire 5000. You can get funds that mimic this index and have low expense ratios as well (Vanguard’s is VTSMX). But as small-cap stocks have the highest returns over the long run have a look at NAESX.
What people continue to fail to realize in looking at the real estate vs stocks is the fact that you have to have a home or some sort of shelter. It is a necessity and not a luxery. So when people say that when you buy a home you have to pay all this interest on the loan vs the investment where there is no interest. It is not an apples to apples comparison. If you were to do a true comparison where you were to take a scenario where you bought your house and lived in it for 10-15 years vs renting and investing the downpayment. While the downpayment will grow at a faster rate, the leveraged return will be higher because you are compounding the property value and not your downpayment.
Also as a owner/debtor you have the advantage of inflation and the fact that your costs have been fixed/locked. When there is inflation you would much rather be a debtor than creditor. So when you invest in the stock market and get 10% but if inflation is 4% your true return is only 6%. But if you owe 700K at 6.25% then after inflation your true cost of the loan is 2.25% without the tax benefits.
Don’t forget when you rent for such a long period of time you have to consider the possibility and reality of moving every 2 years, having to have your kids in new schools every few years, redecorating if you are allowed that and many other psychological factors that home ownership provides taht renting does not.
Values will return to historical means. That means across-the-board price declines for the near future followed by stagnation. That means anyone who buys today could buy for less tomorrow.
There are also good indications that rents will feel considerable downward pressure as well.
I find the financial arguments attempting to justify purchasing at today’s prices to be laughable. If there was any such justification, why have sales numbers diminished?
The answer to the question is out there for all to see: Prices are still way too high and nothing will move inventory except for price reductions.
People always just look at the price they bought the house at and what they sold it at to dtermine their “profit”. You have to factor every cost associated with that home. Not factoring those in gives one a false impression of profit made just like you did.
—
CBB has a good point. Don’t forgot get to subtract repairs too! New roof, windows, hot water heaters. 30 yrs is a long time to not have anything go bad. Also, consider the remodeling cost you will incur trying to modernize your castle when you are ready to sell. Take a look around the NW Side and you see what i mean…. All that needs to be deducted from your “profit”.
Jack – “I have made millions in real estate. Land development and construction is where money is made in real estate, not from holding a stagnate home (even if you do pergo, granite, and stainless steal remodels).”
I dont think anyone on this site is claiming that buying a home is an investment or that the stock market over the long term hasnt returned more than the money one puts into their home, and I am certainly not claiming that. And G, once again, there are many reasons one buys a home at a particular time. If one’s only goal is to buy at the cheapest price possible, then it is obvious that buying now is not a good idea. But rarely is buying at the cheapest price possible the only variable.
pete – We are in a very bad historic time for residential real estate in many parts of the US. The rust belt was a given, but the over all bubble run up with the 93% run up in some areas is unprecedented. We don’t know how bad this thing will actually get. All we know is it is bad but could spill over to be catastrophic in other areas….it is already a depression in residential real estate. Let’s hope that the depression is contained to real estate. Yes, people do not buy on just price as the only variable, but it is THE DOMINANT variable for most. There is no rush to buy and unless you are going to liver there a long time, renting is by far the better option for most people….think of the transaction costs that never get recouped….divide by 24 months and you’ll see how much that adds to the monthly bill along with further asset declines. The hold costs over a period of a 24 month ownership could be 3-4 times the rental costs when factoring in further price declines, plus the anxiety.
pete, once again, I didn’t say that price is the only reason to buy. I will say again that those who don’t care about the price make up a tiny fraction of the market. They might make prices a little sticky on the way down (because they are obviously the only ones still willing to buy,) but they will not create enough demand to put a dent in the supply. Only large price reductions will do that.
Let’s meet back in this thread in 6 months, ok? Then we will see how much those who are still buying now have actually impacted the inevitable price declines.
“I’ve made millions in real estate”
Are you hiring attorney’s!!! 😉
G and John – I actually think we agree on most of the salient points. Prices are going to continue to drop precipitously for several more years (dropping in some geographic areas more than others). People consider price as the dominant variable most of the time when deciding whether and where to buy. If you are looking for new housing right now, you should be looking to rent, not buy. I am not quite as bearish as you probably are, but I am most certainly bearish for the forseeable future. I got out of REITS in 2004, which was a little early, but it was better than being a little late.
BP to move 1,200 jobs to downtown Chicago from suburbs.
“Sources familiar with the latest developments say BP is moving jobs back downtown to accommodate the desires of its workers. Many of the workers are younger and want an urban environment, said one person familiar with the decision.”
http://www.chicagotribune.com/business/chi-080506-bp-move-to-chicago,0,5166013.story
“Let’s meet back in this thread in 6 months, ok? Then we will see how much those who are still buying now have actually impacted the inevitable price declines.”
It’s been 2 years.I think its about time you guys met back here and discuss the results.