I'm just revisiting this after a couple days, so many replies! Ego, your second post really had some excellent points to get me thinking, thanks for that.
Secondarily, since I see many folks referencing emotions, and mine being one of the first posts, my apologies if I came across as emotional (only on an ERE site would one apologize for having emotions ). I always feel this disclaimer is needed online, since a. no one knows my personality and b. depending on the mood of the reader (since no tone is present in typing), the same words have different meanings. To be honest I don't really care much about this topic, it's just interesting to me
Ok, since Ego is cool with this discussion.
@JasonR
I think part of Ego's REIT suggestion could be that in many areas (NYC, DC, San Fran, Toronto, Vancouver, London, Boston, San Diego, L.A., etc.), which all happen to be job positive cities for the most part, it's almost impossible to buy a starter house because they have been bid up so high.
@Aussierogue
Yes, I have to agree, the US isn't out of the woods yet. Though, it could go two ways: another sell off or a long-term dead market.
And, the current decline in housing inventory without an appreciable uptick in housing purchases is foreboding. http://www.ritholtz.com/blog/2012/02/75911/
I was just reading a post on a blog about the author's decision to sell his house and go back to renting. He discussed his reasons why here: http://jlcollinsnh.wordpress.com/2012/0 ... e-numbers/
This was my comment:
"Timely post, as I’ve been going through this argument in my mind and on paper (as I do calculations).
I’ve come to the overwhelming conclusion, that while buying will likely come out ahead monetarily for me if I stay in one place for 10+ years, However, I don’t really like the idea of being chained to a location (and house) for that long. 10 years is a long time in one person’s lifetime, as life is relatively short.
I like the idea of one day living off my dividend income and perhaps traveling to low cost locales like Ecuador, Thailand, the Philippines and what not. Being tied down to a house in hopes it appreciates and sells so that I can go somewhere is uninteresting at best, and sickening at worst. And, even if I don’t travel and stay in the United States once you’re no longer tied to a specific geographical location through employment…then you’re really free to come and go as you please and that’s a freedom that I’m willing to pay a premium for through renting.
There’s always the option of renting out a house, but who wants to worry about landlording when you’re off living a wonderfully exciting life somewhere 5,000 miles away?
I don’t enjoy cutting the grass, painting walls, customizing a living room, landscaping, impressing neighbors, being tied down to one location, being tied down to an object or having most of my net worth tied up in one illiquid asset that is slowly falling apart.
Great post!"
JasonR
2% or 6%. Regardless of the amount, it is still a rather large amount of money to exit the house.
2 years of the past 5 to avoid taxes: It is inefficient to live in a home you don't want to in order to avoid taxes. This is a legitimate barrier to easy exit.
With regard to amortization: Buying today is nothing like buying when you bought. The average mortgaged-homeowner moves every 5-7 years. Doing so is extremely foolish because they never chip away at principal, but they have no choice. Add taxes, maintenance, insurance, down payment, and the 6% cost to sell and the average person gets slaughtered.
REITS: Right now my wife and I have the ultimate gig. We manage a small apartment complex in exchange for free rent, a small salary and other benefits. The company for which we work just doubled in size in one day. They took over the management of a large portfolio of foreclosed properties that are on the balance sheet of a national bank and are being bundled for sale. The goal of our company is to make them income producing. I must admit, I assumed it would be a REIT that would be purchasing a bundle of properties this large.
Chad's article above pointed out the decline in housing inventory. That's where the inventory went. Companies that once dealt exclusively with Grandma Oaks Dying Village are now managing bundles of single family homes.
@JasonR
Agreed, it is a scary proposition. It starts us down a road that is closer to what happens in a lot of London. Essentially former nobles own most of the land, but don't want to sell it. So, if you want to "own" a house you have to lease the house for 30, 40, 50 years to a family for the price of a house. This house then reverts back to the former nobles after the lease. I don't know why anyone would do this. Talk about screwing people.
*If you buy well below the market, min 75% or less of list, you can fairly easily sell, quickly and still not lose much in the worst case. Always buy ugly, it pays.
*Owning has increased my flexibility in several ways.
1) Housing is now a small enough % of my income, I am moving to PT.
2) At PT I will be much more free to travel... The house is insured, I can monitor it from the internet, I have people/neighbors I could have look at it. Lock it up and take off for a few weeks.
*I finally have the space, freedom for some hobbies: 20 gallon brew/cooking pots, small shop, yard for garden, so on.
*Upkeep and repair is remarkable inexpensive if you do it yourself... When you hire a contractor you're paying about 30% in materials, 70% in labor.
Some negatives: taxes and utilities. I'm worried about huge jumps in both... My city water recently doubled.
Paper by the Kansas City Fed on building household wealth with home ownership vs. renting. http://www.kansascityfed.org/publicat/e ... paport.pdf
The study found that during the 1970s & 1990s home ownership unambiguously built more wealth than renters who investing the saved cash.
But during the 1980s & 2000-2009 renters came out wealthier than homeowners.
It comes down to timing the markets. Those who bought before booms built wealth and outpaced renters. Contrast that with those who purchased at the top. Many lost everything.
With 50% of all homes underwater, can anyone foresee the next boom that would make home-ownership the wealth-builder it was in the 70s and 90s? Or will the massive inventory of foreclosed homes ensure a decades long Japanese-style stagnation?
Who can say?
What this study shows is that renting is an extremely effective downside hedge and ownership, while it can produce wealth does so with considerable risk of 100% loss.
In the early 1970's one could buy a 3 bdrm, 1.5 bath 1250 sq ft brick veneer home for around $16,500. One paid $500.00 down, and received a FHA235 loan for 30 years. The payment (all 360 of them) ran less than 30% of gross monthly income. These were in subdivisions. A builder bought a cow pasture, made some roads and utilities, and developed the area on 100X150 foot lots. Many still live in the homes they bought back then. What happened, though, is the programs outside of FHA235 gave some people a nearly free house in these subdivisions, which attracted less than desirable people and ruined the neighborhoods. This can be seen all over the USA.
Next, in the 80's and 90's, the same thing happened on a larger money per house scale, and better subdivisions of properties developed. The homes were larger, more appointed, but the lots were smaller. Unemployment was not radical and people operated with a conservative nature more so. Some of these developments increased rapidly in price and survived the influx of loser-buyers. However, some of these even are beginning to fail today. This due to general poor attitudes, drug use, and lack of motivation.
Starting in 2000 and on, with the prosperity illusion running rampant, people began on the McMansions. It got so out of hand that even in the years prior to 07 and 08, people were defaulting and ruining neighborhoods. As said above, homes now are underwater, foreclosed, and the great subdivisions are falling apart.
All along, a homebuyer could be injured by having bought into a subdivision, either overbuying or taking the hits from those who ruined the property in other ways. The realtwhores played dirty, the mortgage companies played dirty, and the buyers took the bait, which translates to greed.
The benefits of renting are several fold:
You can rent more home than you can buy.
You can exit easier when the neighborhood goes to hell.
You should be secure, as you are probably renting from someone who could not pay the mortgage without you, and will do whatever to keep you happy.
In support of buying, you should not buy in a subdivision or community that can easily go downhill in today's society. You, of course, should not let yourself get overextended financially, and actually be able to afford what you buy, come hard times or good times. If you buy yourself a home and your happy with the costs and where it is located, it does not matter if the value goes up or down, although any smart buyer will keep in mind a possibility of a future sale of the home.
Also I recommend don't get hung up with "retirement" communities, lake lots, and other water front properties. They are twice the costs they are worth.
I'm not getting the idea that renters have "no chance" to hit it big. Since our comparison is renters who _invest the difference_, renters certainly have a chance of buying a stock/index that does extremely well compared to the housing market.
I agree with ego that it's similar to market timing. It seems to me that, if your object is diversified risk, you would want some real estate. Buy cheap enough so you have plenty left over to invest in other stuff. If the housing market goes absolutely insane, you can sell. If it tanks, you might consider buying a rental property or "trading up" if it makes sense.
As dragoncar pointed out, the upside still exists with renting. Renters can invest the unused downpayment funds. This investment could reap a big reward in the same way that home appreciation could reap a big reward.
However, if that investment declines, the renter loses only the amount of the decline. With the high barriers to exit (2-6% commission) plus closing and other costs - and - the leveraged position, homeowners assuming higher risk of decline.
I feel that home ownership is the prototypical example of the typical American sense of entitlement. It's not typically a question of financial viability... it's more a question of whether or not someone will give them the money. Present company excluded of course
My grandma and my mother both graduated to home ownership. It worked out well - financially and logistically - for them. Now it's my turn. The fact that it may be far more economically viable to rent in the part of the country that I choose to live is impertinent in far too many cases.
). I always feel this disclaimer is needed online, since a. no one knows my personality and b. depending on the mood of the reader (since no tone is present in typing), the same words have different meanings. To be honest I don't really care much about this topic, it's just interesting to me 
