Unless you stay put 5 years, you likely should rent
When you buy a house in today's market, it can take at least half a decade to recoup your costs. If the home isn't in your long-term plans, however, you may be better off renting.
It has long been an article of faith among Americans that homeownership is a sure path to financial stability. But with home prices in big cities such as Phoenix and Miami sitting at roughly half their peak 2006 level — and in major markets overall, down 28% — plus a lackluster economic outlook, does it make any sense whatsoever to buy a home now?
The answer is the old one: It depends on where you buy and how long you'll stay put. These days, however, it's really true. (Bing: How long, on average, do buyers remain in their homes?)
The time when you could buy a home and be assured of a windfall when selling two years later was an aberration of the housing bubble, which resulted from annual price appreciation of as high as 10%. Now, expecting to sell at a tidy profit within even a decade may be risky.
It will probably take at least five to seven years for buyers to make back the costs associated with a home purchase. Closing fees can total 10% of the purchase price.
In areas where prices are still declining, such as Seattle — down 4.1% in October compared with October 2009, according to the most recent Case-Shiller Home Price Index — and Atlanta, down 6.2% in that time frame, buyers must be even more conservative about their time horizon.
- On our blog, 'Listed': Is a new bottom in sight for sellers?
Still, with interest rates at historic lows and prices so depressed, cautious and realistic house-hunting now can be a good move, says Stan Humphries, chief economist at real-estate website Zillow.com. He says home values could hit bottom early this year.
"Renting is getting more of its day in the sun, after a long period when buying a home had more cachet," he says.
Shelter versus investment
"It's a perfect time to buy, if you can get financed," says Kevin Bennett, 32, a computer entrepreneur by day and a waiter by night.
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Bennett and his wife, a pharmacy technician, have just bought a bank-owned, four-bedroom, two-bath house in a nice Indianapolis neighborhood for $85,000, well below the city's median home price.
The couple, parents of a toddler, have rented for the past four years but watched as the price of this home was slashed repeatedly this past summer. After attending a seminar offered by the nonprofit Indianapolis Neighborhood Housing Partnership, Bennett improved his credit score, which helped the couple qualify for a 4.5% fixed-rate loan. Their monthly payments, including taxes and insurance, will run about $750, compared with the $900 they were paying in rent.
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"We're buying low," he says. "It's a good investment."
Looking ahead, Humphries says that homeowners could be in for several years of below-average price increases — perhaps 1% to 2% annually — as markets recover from their hangover. Only after that might housing return to its historical trend lines, which would mean price appreciation of 2% to 4% a year at most, in the longer term. The notion of a home as a place to live, rather than as a source of cash, is coming back into vogue, says Chris Herbert, director of research at Harvard University's Joint Center for Housing Studies.
"We're going back to normal," he says. "Which is, you put your money in, and you don't touch it."
Rey Weldert, a scientist who recently took his house in La Grande, Ore., off the market after watching it languish for two years. He has dropped the price by more than $100,000 to $279,000, which was about what he paid for it in 2006.
"We got caught in the bubble," he says.
The tax deduction for home-mortgage interest could affect your calculations. Mainly, Herbert says, it subsidizes the cost of ownership for affluent families who itemize deductions on their tax returns. The federal standard deduction is now $11,400 for married, joint filers, while the first year's interest on a $160,000, 30-year loan at a fixed rate of 5% is about $8,000, according to Bankrate.com's mortgage calculator. A family would need more than $3,400 in additional deductions to benefit in that scenario.
People who are worried about their job security or who must relocate periodically must be more calculating now, too.
"It used to be, if you got transferred to Timbuktu for three years, you'd buy," says Mary Linge, director of homeownership and education at Hudson River Housing, an affordable-housing advocacy group in Poughkeepsie, N.Y. "Now, you have to ask: Will I be able to sell?"
For many people who have faced that question lately, the answer has been a life-changing "no." Take Tom Iverson, a fisheries biologist in Portland, Ore. He and his wife, Laurie, made the tough decision in 2010 to turn their house over to the bank after concluding it was worth $150,000 less than their outstanding mortgage amount.
When home prices soared, they'd refinanced with an adjustable-rate loan, taking out roughly $45,000 extra to pay off credit-card bills run up during Laurie Iverson's breast-cancer treatment. Eventually, the interest-rate reset and boosted their payments to an unsustainable 60% of Tom Iverson's income.
Portland, like other Northwest markets, entered the downturn later than other parts of the country, and home prices there are still falling; the couple reasoned that a near-term turnaround was unlikely. In January 2010, after trying and failing to negotiate a solution with their lender, they stopped making mortgage payments and moved with their children to a nearby rental.
"I'd own a home again," Tom Iverson says. "But not one that is more than 35% of my income."
Meanwhile, the family's housing payments have dropped by half.
Lori H. We rent due to my husband being transferred frequently. We moved in on June 2010 having to sign a 1-year lease. January 2011 our landlord called telling us he was "selling" the home & putting it on the market ASAP. We knew right then he was either foreclosing or doing a short sale.
We were right. We're in a 1970 something home paying $990 a month we find out his payments are $564 a month. How long has he NOT been paying the bank & pocketing the $$. I put a sign on the door that reads "we are RENTER'S not OWNER'S" because you read so many horror stories of banks coming in while people are gone & trashing/clearing the home.
We have to find another place. our fear tho is when we're signing another lease is that landlord looking @ us already knowing he/she are in foreclosure & just wanting to make $$ while it winds it way thru the system?
I am a single female Chinese-American homeowner since 2002 in Texas. House markets go up & down, hanging there as long as one can we will be fine to get into or out of homeownership.
But some counties (officers) could add extra pains to already beaten down homeowners. I moved to Maryland from Texas in 2009, brought a foreclosure 3-bedroom/2.5-bath, did a lot repairing but the mortgage is equivalent to the rent for my one bedroom apartment in Bethesda. Before I could enjoy, I got notices from the Montgomery County (Maryland) House Code Inspector (Mr. Pillgreen) accusing me operating an illegal accessory apartment. That was shocking because I live in my house alone (my son was a college student in Texas).
One day in October 2010, the Inspector Pillgreen gained his access to my house by saying that he was just doing his job (his working unit is complaint-driven, and there was an anonymous complaint against my house). Within two minutes, the inspector clarified that I do not have an illegal accessory apartment (because I do not have a second kitchen and I do not have a tenant). Instead of closing the case and leaving, he conducted a 50-minutes room-to-room full house search without a search warrant (a violation to my right of the 4th Amendment). He searched all closets, storage room and garage. When he saw my spare bed set in the storage room, he suggested that I open a window to convert it into a bedroom so that I would have 4 bedrooms to increase my property value a lot. I told him that I have enough bedrooms already and I did not want to open a window in storage. He then ordered me to move mattress to another area (does not have a window neither). Ridiculously, he ordered me to move my bed out of my bedroom saying that windows are 4-inchs higher than a code standard. My house was built 20 years ago and has been bought and sold as 3-bedroom by all previous owners. The Inspector said “too bad, your realtor did not tell you the truth. Your house only has two bedrooms.” I called police to get the Inspector out of my house.
The day before the Thanksgiving 2010, I received a letter from the Inspector stated that if I do not grant him an access to my house on Nov 24, 2010 I will be issued a civil citation in the amount of $500 per room and $750 per day for occupying my bedroom and storage. With that kind of excessive fine ($1750 per day) Montgomery County (Maryland) could have my house, and force me out on street soon. My Thanksgiving was ruined by this cruel threat of action that would violate my right of the 8th Amendment (excessive fines). I complained to the Montgomery County Director.
The harassment keeps going on. The last working day of 2010, the inspector called to schedule an inspection at 9 AM January 3rd, 2011, saying that his supervisor would come too to close the case. I asked my realtor to join the inspection. But the Inspector cancelled the inspection at 8:30 AM January 3rd, 2011 for a health reason. Yesterday, I received a citation issued by Montgomery County Inspector for “Operating a rental facility without obtaining a rental license”. He signed the citation under the penalties of perjury.
It is beyond terrifying. Being a state officer from an anonymous complaint-driven Housing Code Department, Inspector Pillgreen perjured himself on signing the citation. Montgomery County (Maryland) is desperate on closing hundres of million$ deficit; the county should down-size the complaint-driven Housing Code Working Unit instead of bleeding/terrifying innocent property tax payers.
I now realize the meaning of “the freedom does not come free”. In order to have peace and wonderful American dreams in my house again, I shall pay lawyers to fight for my rights.
Why wasn't this good discussion available 3 or 4 years ago? I blame the Feds for the housing meltdown. Loans were made far, far too easy. Let's get back to 30 year fixed rate mortgages, with 30% down payments absolutely required. Had we not strayed from long held banking practice, the catastrophic housing market destruction never would have taken place. Also, bear in mind that there is an inverse relationship between property values and real estate tax rates. I mention this because as states and local governments become more desperate for revenue, the temptation to raise real estate tax rates becomes near overwhelming. This drives home values immediately downward, further dampening any hope of a timely real estate market recovery.