Prof K's Slightly Different View on Housing

my first house

rent buy live at home decision

I have a slightly different view on buying a home than you might have read
 so that I thought I'd share it with you.

You will always need  or want a place to live

Because you have to live somewhere the key is how much you have to pay for it as compared to other  alternatives. In financial  terms lets compare rent vs buying  ( non financial factors are just as important but I'm not discussing them   here

rent increase chart

1-  When you rent you are always paying someone else for the rest of your life.  Plus using averages, rent might increase 5% per year every year. On day one  this  is a cheaper option than a home purchase but not forever. .

2- When you buy a house in California ( assuming a fixed rate loan) your  total ownership  costs are likely  to increase  nor more more than 1%  a year.   That's because  you loan payment doesn't change,  Prop 13 limits property tax increases to 2% a year and other costs insurance  etc  insurance  increase at the same rate as rent would.  Therefore even if a rent vs buy analysis showed that today renting was far less expense if at some point  renting will   cost you more because the increase each year is much greater.

tax savings

3- I am not going to calculate the cost here ( if you close to buying a house you can email me and I'll help you lay them out on paper) but here is an example .

 If your rent is $1500 a month   in year one and  your house payment (everything taxes  insurance income tax benefit) is $2200  Renting looks cheaper  by far.  But in this scenario where are you in 5 years just in payments?  Rent going up 5% a year  compounded is now $ 1915  and the home purchase expense is $2212 a lot closer.  Now add in the fact that because home interest and property taxes are deductible you now itemize.  Lets  use $250 a month tax savings and now they are almost the same.

rent vs buy yearly payments chart

4- The crossover is typically between 5 and 9 years depending on your unique numbers.  Let's say 7 years.   In years 1 to  6 you pay more for your own home (the difference decreasing each year ) but in years  8 -30 your home ownership cost is less and  in not too many years after year 7  substantially less   just when when you need more of your money for children etc.

mortgage paid in full

5- Finally after 30 years your home is  paid off.  This 30 year period coincides approximate with when you will think about retirement. Buy the house at 30 years old pay it off by 60 and don't have a "rent" (house) payment by the time you are close to retirement.  You'll need a lot less money to live on in retirement if you own your home outright than it you rent. 

Other thoughts   

1 Don't consider your home an investment - As i said in the very beginning you have to live somewhere.  Owning rental property is an investment  ( and a good one) .  Or if you downsize in retirement and buy a smaller house then  yes ....but people get to focused on how much is my house worth today as opposed to how  expensive is my payment vs rent. 

2- Beware variable interest rates especially now - It's the rare case that a variable interest rate is

low interest rates today

good for you in the long term.  Variable interest moves the risk of higher interest form the bank to you.  Why do you think banks love these loans?  A small savings now may cost you ton's of money later. 

3- Don't buy a home with the expectation it will go up in value and you will move in a few years. This ties in with the banks argument for a variable loan. Buy a home fully expecting to live in it for 10 years plus ( if things workout and you can sell it sooner fantastic ) but if you plan for 10 years you should be ok.  Buy a house that you like waking in the front door of every night.

  I've been in  my house now for 31 years and I still enjoy walking in the front door and the neighborhood  which it is in.

high cost of moving

4- Understand how very  costly it is to sell a house and buy another.  It can easily be 8-10 of the
total value of your home.  6% real estate commission 1-2% the cost of a loan for your new home at the same mortgage amount, moving expenses , fixing up your old home to sell it.  Plus all the cost of making the new home "to your style".

5 -Consider buying  "wholesale" when you shop for a loan".  You would think that  if I shopped around credit union bank etc. I would get a better rate than if i went through a 3rd party ( a  mortgage broker)  For me the costs were a lot less and the service was better using  a  mortgage loan broker.  Good ones are few and far between but I found a great one.

6- Be creative when buying .  When i bought my first house ( a townhouse) i bought it with a college roommate. Between the two of us we could afford it. When he got married an moved out I bought out his share  and found a roommate to help with expenses.   I was willing to sacrifice some privacy for living a a much nicer place than i could afford alone.

foreclose

7- The mortgage crisis.   Yes some people got in trouble with their mortgage because they lost their jobs.   However many others thought of their house as a source of cash.  When house  prices dropped you could not flip it either.  But if your in the  housing market for the long run the cycle turns and your still much better off than renting.

Hope you found these thoughts interesting.