I think the point of the post is that, yes, often you are worse off than renting. There are extra costs and responsibilities that come with owning, plus the substantial financial risk in case your home does drop in value.
Check the NYT rent calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) and see what the situation is if it costs you 30 years rent to buy a place. If the value does not appreciate, you have to rent go up at a rate comparable to mortgage interest and property taxes to even have a chance of breaking even after 30 years.
I couldn't find exact modern numbers on rent increase rates, so I have to wonder how accurate the default of 3% on that calculator is. My rent increased between five and ten percent every year the five years prior to buying my home. Therefore, my home purchase (per the calculator) comes out as the better solution in only four years.
Also, buying last year had the added bonus of an $8,000 tax credit. Not a discount on your income, but an actual dollar for dollar credit (ie, come tax time, I add $8,000 to the refund amount). That's seven months of rent at my prior place. Not a bad deal. Thanks to the deductions from paying my mortgage (versus no tax deduction that I'd have gotten with renting), I saved just enough money on qualified income to fall under the first time home buyer credit limit. Worked out well.
Anyway, it definitely depends on where you live. Circumstances change drastically, even within a state. Even just outside of a main metro area. San Jose is cheaper than San Francisco. Beaverton is cheaper than downtown Portland. Westminster is cheaper than Denver. In some places, owning will simply never be an option. I couldn't afford a million bucks for a 900sqft home in San Francisco. Hell, I could probably barely afford rent.
Based on my personal experience, I would advise people to buy sooner than later. That is, I personally wish I'd have bought five or ten years earlier. On the other hand, I think I was also wise to wait until just the right time in my life and the market to buy and I think that's a wise path to take, too. You may be putting off the benefits of a home if you delay, but at least you're not making any commitments by paying rent, either. In the long run, I think that is the mistake too many people make. They feel the ticking clock and buy because everyone else says that's what adults do. That leads to buying too much and extending yourself and your credit too far. I know home-ownership is "the American dream", but I think it's a dream that you have to let come to you, when the time is right for you.
My rent increased between five and ten percent every year the five years prior to buying my home.
Please check my math: using your numbers and averaging to 7.5 percent per year, that would be a cumulative increase of (1.075)^5 = 1.44 = 44 percent increase.
Did your rent really go up 44 percent over 5 years? Where do you live?
As an additional data point, I rented a house with some friends in Beaverton for 5 years and the landlord never raised the rent.
Close. I think you counted an extra year in there. It increased 5% at the end of the first year, 7% the second, then 10% the third and fourth. I moved out at the end of my lease after the fifth year, so I don't know what the fifth increase going into the sixth year would have been. It started at $900 and five years later, it was $1,215. That's a 35% increase.
I lived in a more expensive apartment than is typical, but there is no housing anywhere near where I am (only apartments). I don't know if proportional increases are typical all over Denver, though. By the end of the fifth year, I was tired of seeing my rent increase at triple the rate of my raises.
Thanks for sharing the interesting historical data! It does sound like buying may be the optimal choice in your real estate market, especially if you are planning on staying put for a long time.
I do think for the near future, rent will continue to rise as more people decide to sit out of the real estate market (waiting for more price drops to occur). Ultimately even this should correct itself as people start buying houses again since they will grow tired of increasing prices and decreasing availability of apartments.
If you buy a home, market fluctuations don't matter. It's your home, you are going to live in it. If you were in the business of flipping properties for a living, it would matter, but not if you buy.
If you toss a mortgage into the mix, which is what I gather most people mean when they say "buy" a house - then yes, market fluctuations can matter a lot - but these are two very distinct things.
Market fluctuations should only impact you when it comes time to sell. Unless your mortgage is an adjustable rate, which is part of the reason we're in this whole mess in the first place. Put enough payment down up front so that you can lock in a good rate that you can tolerate and don't play the ARM game. That seems like lose-lose, to me. Maybe things go really wonky and I find in five years that I could have locked in an even better rate if I just waited? Well, that sucks, I suppose -- but I locked my rate in at an amount that I was willing to commit to (and I bought far less house than I could afford, so that I had some long term wiggle room).
Unless I'm missing another aspect of potential impact, which is totally possible. I can barely tie my own shoes, sometimes. :)
Just curious (because I've never honestly looked) - can you really lock in a rate for the entire, say, 25 year length of the mortgage?
When I asked a mortgage broker friend (Canadian) about this not too long ago, it was explained to me that yes you could lock in a rate for the "term" - but the "term" was 5 years, and after 5 years it would be adjusted depending on the prime rate, etc..... so from what I gathered you coudln't actually just get a plain old "25 years, x%" mortgage.
In the US, it's standard to have a fixed rate for the entire life of the mortgage. It's my understanding that this state of affairs is due to US laws and that most other countries tend to have floating rate mortgages.
That may explain why renting is the norm in a lot of other countries and owning a home isn't considered a big deal (while, in America, it's almost an obligation before you can feel like you've made it). Shifting terms is unsettling. I don't know the history of loans in the states, but I wonder how much of the 30yr fixed was established in response to everyone returning from service after WWII and starting families and buying property?
Dunno about Canada, but in the US a fixed-rate mortgage is, well, fixed. My rate will never change, and thus my monthly payment will remain exactly the same for the 30-year life of the loan.
Canada is distinctly different than the US. I was also surprised when I realized this difference. The scary part of this all is that even though folks with good credit were able to taken advantage of full-term fixed rate mortgages (i.e. prime borrowers), the US still endured the housing bust long after the majority of the sub-prime borrowers defaulted.
I'm not sure about other Commonwealth countries, but Canada definitely does not have this option. Our mortgages have a specific mortgage rate term (usually 3-5 years), separate from the life-time of the mortgage (usually 20-30 years; the 35 was/will be no longer be available). This means that interest rate fluctuations are more devastating when they rise for those who put little to no money down on their expensive housing purchases in Canada recently.
There are longer then 3-5 year mortgage terms in Canada. I believe up to 15 years is commonly offered.
Amortization length of a mortgage can be up to 35 years for residential mortgages. 35 year amortizations were only eliminated for CMHC/insured mortgages.
I would contend that the system is more stable when borrowers are forced to consider the consequences of future interest rate increases.
If you buy a home for a lifetime, sure. But most people do move not too infrequently, and then it does make a difference. That's why the question is: how long do you have to stay in the same place for buying to be financially advantageous.
Check the NYT rent calculator (http://www.nytimes.com/interactive/business/buy-rent-calcula...) and see what the situation is if it costs you 30 years rent to buy a place. If the value does not appreciate, you have to rent go up at a rate comparable to mortgage interest and property taxes to even have a chance of breaking even after 30 years.