After 99 comments, let's start again....
I am amazed at the back and forth as to what it takes to buy a house in Santa Barbara. Almost 100 comments later -- let's continue here with several questions:
1) Going away and coming back is argued as a good and bad move. Which is it?
2) Renting versus Owning Your Home is argued as a good and bad move as well. Which is it here versus elsewhere?
3) Will the national mortage collapse mean we all buy homes in Santa Maria and Oxnard but not SB because we are THE corner case of what is going on around everyone else in the country? I say those of us without homes have six months to get our act, and a down payment, together for our perceived family good. What say you?
Clearly, BlogaBarbara is not just about the state of a certain newspaper housed at De la Guerra Plaza...thanks for the conversation, advice and big picture on real estate in our hometown.
1) Going away and coming back is argued as a good and bad move. Which is it?
2) Renting versus Owning Your Home is argued as a good and bad move as well. Which is it here versus elsewhere?
3) Will the national mortage collapse mean we all buy homes in Santa Maria and Oxnard but not SB because we are THE corner case of what is going on around everyone else in the country? I say those of us without homes have six months to get our act, and a down payment, together for our perceived family good. What say you?
Clearly, BlogaBarbara is not just about the state of a certain newspaper housed at De la Guerra Plaza...thanks for the conversation, advice and big picture on real estate in our hometown.
Labels: housing, housing v. renting, real estate
posted by Sara De la Guerra | 12/02/2007 11:28:00 PM
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132 Comments:
There is only one truly capitalist, non-communist way out of our housing mess.
It is our great, renowned, life-affirming FREE MARKET!
Build Build Build! The supply-side can solve everything here!
To those who bemoan some perceived quality of life risk, you are sniffly nosed wankers!
Only communism uses BIG GOVERNMENT to dictate to the glorious free market.
Neighborhood associations are just LITTLE COMINTERNS run by LITTLE STALINS.
Turn over your quality of life concerns to the glorious free market. Trash, water, utilities, green building, organic local food production.
Government control = communism, including County Planning and City Planning.
Free market building for the people = nirvana.
BUILD BUILD BUILD!
Make a list why you want to live in Santa Barbara first before you do anything.
Then decide if buying the lowest priced condo allows you to still like living in Santa Barbara. If it does, then buy it if this is the only thing you can afford.
If your list shows you would be happy living in a lot of other places that are more affordable, then just rent here and think about moving later if you want to buy.
One historic wage/house ratio example.
1978:$11 an hour and a $75,000 condo.
2007:Same job now $55 an hour and condo is $650,000.
Here are 3 essential reads on the housing bubble:
Now even Greenspan agrees, an guess what... he said the bottom would come in 2007! Anyone who says not the bottom will come in 6 months or 1 year is participating in wishful thinking.
Rent to get rich. The details on why you do better now renting and investing the difference between your rent and a mortgage in solid investments (say, Vanguard index funds... no, I don't work for Vanguard).
Patrick's web site is another valuable resource on the reality of the bubble and the advantages if renting and investing.
In a nutshell, total cost to own is now 9% of the cost of the home per year, 7% after the mortgage interest tax deduction. An entry-level $450,000 Condo around here? With $50,000 down payment, that is a total $2,700/month (accounting for the Mortgage Interest Tax Deduction). You'll end up paying about $800,000 for that Condo over 30 years.
Instead, rent a 2-bedroom apartment for $2,000/month and invest $700/month, and invest the $50,000 down payment.
The investing over 30 years will give you $2.3 million, assuming 10% return, which is the 200-year average return of the US Stock Market.
The home? Historically, Santa Barbara real estate has had a 7% annual return, but we've had a *HUGE* bubble in the last 15 years, further, condos only appreciate at 5%. So, your condo will be worth only $1.9 million, which is less than the investment would give you!
Of course people will say, flip the condo, flip houses. This isn't going to work any more because we're not in a bubble.
Remember, real estate agents are out there to get rich themselves; if you happen to do well too, they're happy, but you are their second priority. And their product is not bad, just a bit worse than renting and investing.
They'll say you have freedom to have a dog and dig a hole in your backyard in a house. If that matters to you, great. But you'll also be a slave to maintaining and repairing your house.
When we bought our home in 1993 we secured a loan for 8.691%. We got in with 10% down but had to take a jumbo loan. The monthly payment bit deep into our disposable income and we hung on to old cars, did not go on vacation, and even bought clothes at the thrift store. We thought that we had lost our minds. But as time went on, we got raises, interest rates declined and we refinanced (never taking out any equity); and now our mortgage payment is less than most folks' rent. We were very lucky, but we also took the risk to live close the edge financially for a while and things worked out. I recommend pulling together the down payment and taking the plunge now, the prices are lower than they have been in several years. Now is the time to take advantage of the opportunity. Get rid of the SUV, make your Christmas gifts, stay in town for your vacations for five or six years, shop in thrift stores, and don't impulse buy, rent DVDs instead of going out to the movies, eat at home; and you just might be able to pull it off. Good luck!
Here is a summary of what we learned from the previous 100 comments:
1. While it may be a good idea to move away from Santa Barbara and never move back, and it is also a good idea to buy a home here, let it appreciate for 20 years, and then sell it and move away and live like a king someplace else with your $2,000,000 profit, it is simply not possible to move away, save and invest money for 10 years, and then move back here, because the prices of houses go up faster that one can make and save money. You may move back with what appears to be a nice $300,000 nest egg but the price and therefore the loan and the monthly payments and the taxes have ALL DOUBLED while you were away. You now find that you can't come close to buying a house here then.
so if you leave you can never come back again.
2. Renting vs. owning is a personal decision but it's the most important decision that you will ever make as far as your future financial condition.
Buying a house is bad if one is going to re-sell it in the short term. but it's the best investment one can make if one is going to hold it for 10 or 20 years.
The reasons for this are two fold: the power of leverage allows one to have five times he amount of actual capital invested and appreciating. this multiplies the return on the cash by 5. This leverage makes the 7% average annual appreciation of the entire house actually be 35 % annual compound return, as compared to a 105 return for stocks. Under the rule of 72 capital doubles in the number of years that one gets by dividing 72 by the compound rate of return. Therefore capital invested in a house over the long term doubles every 2 years.
While theoretically the stock market goes up an average 10% a year over the long term, as compared to 7% for a house, one has to take into account human nature. It is a fact that only 1% of those who rent and invest ever accumulate as much return on their investments as those who buy a house. human nature is such that they simply spend their money on their lifestyle instead of saving and investing it. The average rate of saving and investment for all americans is only 1% of their annual income.
Conversely 995 of those who buy have just committed themselves to a FORCED savings and investment program for as long as they own the house. It forces them to lead a more frugal lifestyle and thus 99% of ant Barbara home buyers automatically come out with $2,000,000 or so 20 years from now. while only 1% of the renters comes out with the equivalent $2,000,000 the other 99% of all renters end up with nothing but a shoe-box of rent receipts 20 years later. and find themselves facing a rent rate which has gone up 400% while those smart enough to have purchased a home find themselves with fixed monthly payments that have not gone up at all and are now half of what he renters pay for an equivalent house.
Those who bought now find themselves financially secure in their retirement years while those who rented find themselves facing retirement broke and with no financial security, and find themselves having to move away because they cannot afford to retire here.
3. The national collapse in housing prices WILL affect Santa Barbara house prices! In fact we will be one of the ones most affected because houses here appreciated way too fast so they now have farther to fall. there is one exception and that is luxury houses over $3,000,000 in Hope Ranch and Montecito. They will not fall at al and therefore they will hold up the median price and give a false appearance of what is really happening to the $1,000,000 house. There will be many more foreclosures in Santa Maria than here but this is a different subject as to why that is the case.
The bottom of the market will be Jan 1 ,2009 , with the following 2 years being almost flat but appreciating 1% each year. After that is is a sure thing that Santa Barbara house prices will double over the following 10 years.
This means that the smartest thing you will ever do is to save up all your money and buy a house in Santa Barbara 1 or 2 years from now. Don't wait or you will see prices appreciating much faster than you can save money and you will quickly be left behind. this is the very last opportunity of your life to be able to buy a house on Santa Barbara and share in this best investment that you will ever make in your life. It will simply make you rich beyond your wildest dreams. There is no other way of putting it. 20 years from now you will think back and say to yourself; " I'm sure glad I followed that advice I read on Bloga Barbara. It was the best decision I ever made. "
Two points:
In the 80's, when many of us bought homes, interest rates were near 10% and more in the early 80s. Subprimes could be as high as 13%
How is this relevent to today's home valuations? See answer below (printed upside down ).
For those who claim homes are too expensive in SB, what premium should be put on a home in SB vs say, Seattle (4-6 inches of freezing rain tonight) or Chicago or Bangor, Maine (i love that name)
or my favorite garden spot, Las Vegas (especially in the summer). Sometimes it sounds like people think SB is in some sort of bubble by itself, like RE hasn't increased by large percentages all over the country.
(what, you think I can really print upside down?)
Prices are going down if you are renting now is the time to save for the downpayment, pay off your debt, get your credit score up. That is if you want to stay in Santa Barbara long term. In another year or two when prices are really hitting rock bottom then buy and if you dont think they are going to just look at the local market there are decent starter homes in Montecito going for just a little more than the San Roque area which wont be able to hold its value when the mid range of the high end collapses. When the two million mark in better neighborhoods goes down so will the middle upper class ones...of course if you bought for long term you should have no problems.
After 30 years or so of paying home mortgage payments, you get to stop paying for your home (except low fixed rate property taxes and ongoing variable maintenance costs).
You have to calculate this now living for free for 20-30 more years benefit versus contining to pay ever increasing rent.
And the equity appreciating free and clear in your paid for house after this time is your "long-term health insurance", that you also do not have to buy which you would if you rented.
Buy the house and then in a few years you also get to invest your extra money as your salary goes up.
And more importantly, you are DIVERSIFIED in both real estate and financial instruments and that is the best advice ever.
It is always best to buy your own home. Always. Don't listen to these people who shave nonsense numbers to prove this is not so. This is quirky and unpredictible financial advice. There is no investment as good as owning your own home. Buy it here, buy it there, but buy is as soon as you can.
Never wait for the market to go down or wait for it to top out. It never does and it never will and you have just made your goal all the more unattainable, the longer you wait.
You have to think long-term; not short-term. And you can never predict the future of any non real estate investment. But owning your own home will be the soundest peace of mind you can ever buy.
Do it now, even if it is a one bedroom condo. Europeans live in a lot less space even if they are wealthy. The live their lives outside their personal residence and this is what this town is all about.
Chinese can live with 250 sq feet for a family of 3. Downsize your living demands while up-grading your quality of life outside your home.
Your home does not have to be your castle here, just a place to eat and sleep and pick up your mail. Your life is living in Santa Barbara. And then joining the rest of us to keep it that way.
Even the market has to respond to zoning ordinances, so it cannot just build, build, build. It has to build within clear limits and contraints of resources.
This current city council with their socialized agenda threw out the zoning code and modified the zoning code to allow this overbuilding and then highjacked the public process to cement this overthrown into new concessions for the builders.
So is it socializm that allows build, build, build? Or, capitalism that has to live with available resources?
Socialism is detroying this down every day this city council continues to sit unopposed with it utopian agenda, head in the clouds and feet out the back door. They are the ones who brought us build, build, build. And they should be horrified at what they destroyed with their alleged good intentions.
Get rid of every single incumbent next round, or we are doomed for sure.
˙ʎɹʇunoɔ ǝɥʇ ɹǝʌo llɐ sǝƃɐʇuǝɔɹǝd ǝƃɹɐl ʎq pǝsɐǝɹɔuı ʇ,usɐɥ ǝɹ ǝʞıl 'ɟlǝsʇı ʎq ǝlqqnq ɟo ʇɹos ǝɯos uı sı qs ʞuıɥʇ ǝldoǝd ǝʞıl spunos ʇı sǝɯıʇǝɯos ˙(ɹǝɯɯns ǝɥʇ uı ʎllɐıɔǝdsǝ) sɐƃǝʌ sɐl 'ʇods uǝpɹɐƃ ǝʇıɹoʌɐɟ ʎɯ ɹo (ǝɯɐu ʇɐɥʇ ǝʌol ı) ǝuıɐɯ 'ɹoƃuɐq ɹo oƃɐɔıɥɔ ɹo (ʇɥƃıuoʇ uıɐɹ ƃuızǝǝɹɟ ɟo sǝɥɔuı 6-4) ǝlʇʇɐǝs 'ʎɐs sʌ qs uı ǝɯoɥ ɐ uo ʇnd ǝq plnoɥs ɯnıɯǝɹd ʇɐɥʍ 'qs uı ǝʌısuǝdxǝ ooʇ ǝɹɐ sǝɯoɥ ɯıɐlɔ oɥʍ ǝsoɥʇ ɹoɟ
to write upside down text go to revfad.com/flip.html
It's like saying "hello" on your TI calculator in junior high -- awesome comment!
dear 5:55 p.m.
What you just said is the most beautiful thing I have ever read in my entire life.
What a wonderful idea.
What a wonderful person you must be.
6:00 p.m.
What you say is right.
The socialists council members are ruining this town ---one monstrosity at a time.
Will somebody out there please start a recall going. It is sure to succeed.
I, and thousands of others, will jump in and help.
upside down...The best comment ever on BlogaBarbara! You put this whole topic in perspective.
P.S. Agree 100% with real estate guru.
Signed, Bill, happy SB homeowner.
I had to laugh at the reference to wages. You chose 1 extreme example. It would probably be more honest and more fair to look at the median salaries for individuals and families from 1978 and compare them to the current mean salaries for individuals and families. Talk about bias!
Hiram,
I agree that growth is a topic whose time has come again.
But...
Who's going to build where?
With what resources?
Responsible to whom?
What about the free market economy of boom and bust?
In old Santa Barbara local visionaries created investment in local interests like the downtown, Cachuma Lake, the hospitals, the schools and the University. That was a mix of public and private money, devoted to the development of public benefit. Kind of ironic if you stroll State St. these days to see how many local businesses have been pushed out to make room for big mall franchisers.
Steve Cushman once said that SB grows at 3% per year regardless of what we do and we need to plan for growth.
Willie Chamberlin once said that we need to allow large land holders to plan for reasonable development or heritage local owners will sell out to developers. The 40,000 acre Cojo Jalama ranch went to East Coast developers last year. There is precious little water on that property which means State Water and years of wrangling over land use and infrastructure development.
With all this opportunity for growth I do have to wonder who we call on to manage it for our local interest. Especially when pushing the locals out seems to be how we get things done around here. Who's got the big picture vision now?
If our democratically elected local governments and concerned local citizens don't, then I guess it's up to you Hi.
If those hear complaining about not being able to buy a house, only want houses in Montecito or San Roque, then talk to my hand.
You will get no subsidies for your complaints, and get used to it. I figured this was behind the cry for more and more housing. Nice to hear this put out in the open finally.
These complainers want deluxe housing at bargain basement prices, so they can continue to lease their BMWs and buy their electronic toys. They probably spend the days whining on per minute cell phones too.
City council, please listen to the true voices behind these housing demands - whining wannabe yuppies hand in glove with greedy developers exploiting this faux hue and cry.
Stop giving in to them and letting the developers drag you around by your noses. And tell the city staff to stop giving them concessions every time they ask. You are letting this town get destroyed with their badly hidden agenda.
No wonder voters got so mad last election. Iya and Helene, I sure hope you are taking notice and start counting the votes a lot more closely this next time.
A dark horse candidate will come forth and capitalize on all this pent-up anger from the residents who have watched you give the store away to these limited special interests for far too long.
Zoning? Sure we need it, to keep the brothels away from the convents and the hog farms out of town.
But zoning to fit some communist idea of limited resources?
The whole idea of limited resources is propaganda. Anyone who espouses has not a clue as to how the resources that they survive on around here got started.
Lake Cachuma and the other Santa Ynez reservoirs were put there by true visionaries who loved to support the free market.
Same for the Central Valley Water project.
Where does your power, your gasoline, not to mention your transportation come from? Giants of the sort that the current midgets aren't worthy to buff the shoelaces of.
We have and can obtain resources to triple the population on the South Coast.
And with true vision, a CAN DO attitude, and the GLORIOUS FREE MARKET, we can make the quality of life way better than it is now.
All the 1-dimensional rich unremarkable intellects of Montecito and the Riviera don't have enough spunk and creativity to imagine how this place can have amazing green buildings, transportation, and local organic farming. They fret away their energy trying to preserve when they could improve.
BUILD BUILD BUILD!
To all those who want to continue to build...tell me again where you're going to get the water? Remember water? That limited resource that gets more and more scarce the more you build in our quaint,semi-arid community.
6:00 p.m.
Where do I sign up to help in a recall?
The only whiners and complainers I ever hear are existing homeowners.
If real estate is such a great investment, how the Sam Hill have we ended up in the current foreclosure crisis?
If the real estate industry were honest, the simple fact is, we would not right now have a crisis that threatens to bring the whole US economy if not the world economy (same real estate bubble in the UK and in China) into recession?
Unbelievable that there are pro-real estate folks in this thread who dare to say home ownership is the perfect investment when a million or so people in the US are facing foreclosure.
And you bet there will be a taxpayer-subsidized bailout. The Savings and Loan bailout cost a trillion dollars or so. The Treasury Secretary and our Governor would only love to buy votes by making handouts of taxpayers' hard earned cash to the real estate barons... they'll keep the screwing of the taxpayer hushed up.
It will amount to a subsidy for homeowners that will be far greater than any given for affordable housing! And don't forget the mortgage interest tax deduction, which is a $100 billion a year subsidy to homeowners.
BTW, you know why the US savings rate plunged to <1%? Because people were buying too much house and no longer saving. Want to see the future of real estate in the US? Look at Japan, which had its bubble burst in the early 1990's and has never economically recovered, thanks to the real estate industry.
California has plenty of water.
Semi-arid? Balderdash.
The snowpack of California's Sierra Nevada is largely used in agriculture in the Central Valley.
At hugely subsidized rates.
If homeowners can pay a better price than agriculture for water, then the free market says do it.
A whole lot of agriculture in the Central Valley only exists because of government subsidies. Not all, but a lot.
And desal will soon be viable. It may be viable now! The Israelis have the CAN DO attitude.
All those who say we have limited resources have never contributed to our great infrastructure in the first place, and it has only been in the last 35 years (since they got their's) that they drone on with utter pessimism and handwringing about how nothing can be done and how everyone else must suffer.
CAN'T DO PETTIFOGGING COMMUNISTS!
Unleast the glorious free market to solve our problems! Smash the pinko planners the little Stalins and their neighborhood Soviets! Make the South Coast great again!
BUILD BUILD BUILD!
Forget a recall or Hiram's liberterian nirvana. Let's elect candidates that promise to approve only projects that adhere to existing zoning rules.
Want a project that requires re-zoning or modifications? Propose changes the zoning rules.
Have a project that adheres to the existing zoning rules? Approve it.
Want hanging gardens of Babylon in the St Ynez mountains? Make sure the zoning allows it and start growing.
We have zoning in place that works. Please, do we have any Council, Supervisor, or Water board prospects with a backbone?
Oh, and this foreclosure thread is worn out too. If you can afford a home today, buy it. If not, rent and invest your excess disposable income. Timing the market is for flippers, not homeowners.
Disclosure: I am one of the previously mentioned 30-something families that bought over the past few years.
12:17 a.m.
The fact s that only 1% of the homeowners are facing foreclosure.
But the vast 99% are going to get rich by owning their own home.
So the fact that 99% of those that buy and get rich by doing so makes buying ones own home the best way to go.
The fact that the weakest 1% cant make it means nothing regarding the viability of the long term investment. all investment has some risk and the risk to a home-buyer is whether or not he swill be one of the 1% who cant hold on.
Remember this fact; 99% of all buyers in Santa Barbara will make $2,000,000 over the next 20 years.
While 99% of all renters will end up with $100,000 in savings and investment profits in the next 20 years. ( this is because of the fact of human nature: americans only are able to save 1% of their income and always spend all the rest.)
Now which group would you say that you had the best odds of success by joining? The facts speak for themselves, and the facts give one the correct answer.
lastly, the reason that the 1% are facing foreclosure is NOT the fault of the sound investment strategy of owning one's own home, but the fault of some greedy lenders who 'set buyers up" for failure by offering them a faulty loan product.
The great and superior potential financial benefit that comes from buying over renting is still there. it's just like in the stock market. the 10% average annual gain is always there and just because the market has a two year correction where some investors lose money does not mean that those who can hold on will not double their money 10 years later.
Would you say that the stock market is a bad way to invest just because a few people lost money. of course not.
Same is true for housing. The prices are a "market". all markets go up too fast during the time prices are going up and so always have to correct every 10 years to pull the prices back down to the 7% average appreciation long term up trend line at which point they always take off again.
The reality is that housing is a LONG TERM INVESTMENT and 99% of all buyers can and do hold on for the next 10 years while the price of houses doubles again and they make a killing on their investment due to the wonderful power of leverage.
12;17
The pro real estate folks are NOT saying that real estate is the perfect investment. They are saying that, for the vast majority of people, buying ones own home is the very best LONG TERM investment that one can ever make.
1% can't make it work for them. This does NOT mean that it's not the best long term investment for the 99% who can make it work by being able to continue to make the monthly payments.
Those that can't hang in there and make it work for them is always because they get themselves into some financial difficulty usually by losing their job or getting a divorce. That has nothing at all to do with the wonderful POTENTIAL that buying ones own home has for the vasty 99% who don't let themselves get into financial difficulty.
those that do get themselves into financial difficulty would have to sell their stock investment too and if the market happens to be down at he time will lose money. Not because the market is a bad investment but because of the TIMING of their financial difficulty.
Should a potential home-buyer rent instead of buy just because some other 1% of all buyers has hard financial luck and can't make homeownership work for them.
All investments have some risk. The more risk the more reward! There is FAR more risk in the stock market then there is in Real Estate. Real estate has a comparatively small risk and that's the reason it's the very best investment because the potential rewards are so great compared to the small risk.
12:17 appears to think that just because there is some small risk, that this makes buying ones own home a bad investment. FAULTY THINKING, my friend. It is that kind of thinking that keeps one from getting ahead. this old saying is so true: Nothing ventured nothing gained
The current speculation lending in real estate problem is going to be solved not by a federal bailout at our expense, but with a moritorium on the interest rate rise at the lender's expense. As it should be. Stop fretting.
to 12/03/2007 9:23 PM,
the reference to wages among the first few comments is a bit shocking. But it is still interesting to compute the numbers.
If you made $11/hr, worked 40 hours a week, and got paid 50 weeks a year, you'd have $22,000/year. That's 29% of that $75,000 condo.
If you make $55/hr, work 40 hours a week, and get paid 50 weeks a year, you're earning $110,000/year. That is 16.9% of that $650,000 condo.
So, this person and what they do making VERY good money now has a more difficult time paying for the condo. Not impossible, but certainly more difficult.
So what else is different, and why would the condo remain affordable (in the sense that the price is attainable under normal and usual circumstances) now?
Interest rates are lower? Property taxes are lower? Lending standards are more loose now?
Does the disparity, even in a job such as the one provided, between the past and present affect affordability now and for the foreseeable future?
6 PM and 12:17 a.m. and all others here:
URGENT:
Recall, impeach... do something.
Just released yesterday: (I HAVE BEEN COPIED ON THE NOTICE AND I WILL SHOW IF SARA ALLOWS including attachment:)
Meeting: 12/18 6 PM AT COUNCIL CHAMBERS:
THE CITY IS MEETING WITH A DRAFTED RESOLUTION FOR CESSATION OF COMBAT IN IRAQ. THEY ATTACHED THE RESOLUTION. INITIALLY, IT WENT OUT AS "IMPEACHMENT' MEETING."
DAS, ETC. ARE BEGGING SUPPORT FOR HIM AND THE MAYOR AND COUNCIL AS THEY EXPECT TO GET - TO QUOTE HIS WORDS- "BEAT UP."
I wrote to Mayor, and council and received two replies so far and guess what: I caught a lie because one staffer accidentally forwarded a note to her about the next Resolution which is Impeachment.
The URGENCY? The CITY is not doing CITY BUSINESS again. AND they are trying to get this done before the "new" guy gets in. They have not answered my question about "Where is/was Francisco on this sneak attack?"
This is the short of it, I'll answer any questions; have to use anonymous as I have no choice.
Sara, please - will you help get this word out and if you wish I will send you the "original" if you post same. Seriously.
Thanks, people. The City needs to work for US. The voters will get rid of the mess in DC.
Buying a house is a very good idea if one can afford it.
Buying a house is not a good idea if one cannot afford it.
Generally speaking, anyone who is the top 75 % of the population annual income can afford to buy a house. and anyone who is in the lower 25% of the population annual income can't afford to buy a house.
If you have a college degree you can definitely afford to buy a house.
If you didn't graduate from high school you cannot afford to buy a house.
Since home ownership is the path to financial success and independence, everyone should work hard and try their best to get a college degree.
It is not the job of government to provide every person with a home that they own. Our system of free enterprise allows every person to work hard and be rewarded by being able to own your own home. Those that are too lazy to work hard enough to get a decent education and/or too lazy to work hard enough at their job to be able to buy a home should not be 'given' a home of their own.
response to 12:17 a.m.
You mention the Japan economic bubble. Yes it burst and the countries economy was stagnant for 10 years. They call it "the lost decade".
But what happened here is totally different from what happened here:
1. Their bubble was much much bigger than our bubble.
2. They has much much more speculative spending and it included the entire country. Ours only included parts of the country, Mainly California and florida.
3. Theirs included BOTH their stock market and all their commercial real estate. Ours was limited to residential real estate.
4. Theirs went to much more ridiculous prices, such that, at the peak, the land under the imperial palace was worth the same as all the real estate in California. Ours was limited to maybe an excess of only 30% of what should have been the true value , so we only have to correct house prices by 30% and they have already fallen 20% in 2 years so they only have one year to go.
Theirs was caused by excess money. Ours was caused by interest rates falling 20% and therefore people bid up the price to the maximum they could afford which was now 20% more.
Now our Internet Stock bubble burst independently that he housing and this is KEY. The stock market corrected 30% over 3 years and hit bottom ( which was the point of true value) and started back up again.
since our stock market bubble which was every bit as big a bubble as our housing bubble had its 30% correction limited to 3 years, our housing bubble will have it's 30% correction limited to 3 years. Since houses have fallen 20% in the last 3 years since the exact time the bubble burst which was June of 2005.
Lastly one must consider the basic law of supply and demand. A bubble bursting does not change the basic law of supply and demand. All that can happen is to have the item which was speculated ion go out of favor as tulip bulbs did in the tulip bulb speculation bubble in Holland a hundred years ago, or so.
But housing can never go out of favor because it is one of the two main requirements of every person to live: Food and housing.
Back to the law of supply and demand. land, unlike all other commodities, is a fixed commodity.
THEY AIN'T MAKING NO MORE LAND
this is the supply side.
The population of California is going to double over the next 40 years due to the 500,000 illegal immigrants who come to California every year.
Now this population growth is the demand side.
The big factor added to the mix is the urban limit lines, drawn by the smart growth city planners, all around each town in California, where they don't allow any new housing to be built outside of. These smart growth city planners want to force all people to live in tacky little boxes on the 6th floor of some big monstrosity like those going up on Chapala. Now just what do you think is going to happen to the prices of all single family houses in Santa barbara. I know what is going to happen.
It doesn't take a rocket scientist to see that housing prices are going to skyrocket in Santa Barbara over the next 20 years.
lastly, consider the last factor thrown into the equation. Santa Barbara is simply the most beautiful and most desirable town in the country. It is a small resort beach town with incredible charm and character. It offers the best possible lifestyle with its moderate temperature and year around activity. Now consider this: There are 38,500,000 folks in california. Most of you don't know that 20,000,000 of those live within just 100 miles of the South Coast. he south coast population is only 200,000. That only 1% of the 20,000,000 population within 100 miles of us.
1%!
Now you just answer me this. Just how many of those other 99% would like to get away from the hell hole that is L.A. and move here? I'll tell you how many: ALL OF THEM.
So much for the claim, by people who just don't know what they are talking about, that the housing prices are going to be flat here for 10 years.
We are not Japan, and what happened there was totally different.
When all you who feel real estate is going to go down in SB want to sell, I will buy.
For the next decade or two Baby Boomers will retire and those with wealth will come to places like Santa Barbara and buy the homes all of you suckers think you should sell.
Real Estate vs. tech stocks - there is a new tech company idea a day and we are not making any more Santa Barbara real estate.
I may leave Santa Barbara but it will not because of real estate value or the beauty - - it will because I cannot deal with the nut balls who live here. My hope is that the crazy nuts sell out and move to AZ and live a happy life. Happy for them and me.
RE Guru,
You should stop before you make a total fool of yourself. I do it on purpose, you seem to really believe in your speil.
Revisionist history, faulty logic, funny (or phoney) math, half forgotton anecdotal info, you pretty much pack it all in. Spoken like a true Guru.
I'm not saying that home ownership isn't a good thing, but you seem to think there is some gaurantee involved.
How do you think real estate would do if we had a massive oil blowout?
How about a deflationary spiral due to globilization (ask the folks in Detroit). Do we have any real industry in this town beside picking grapes and making beds? The industrial buildings on Hollister are half empty and certainly not involved with business making real money. Of course we could all become police and firemen and beaurocrats cuz they never lose their jobs and always get their guaranteed raises every year...even if they do a crappy job of law enforcement and city planning.
What happens if we continue to only bring housing and hotel developement, and then energy costs spike and no one drives to SB anymore because of gas rationing?
A hundred things to go wrong to upset your polyanna visions of riches through real estate.
How do you know about the CITY resolutions? It's not in a paper or online that I can see yet.
What do you know and how do you know it? Do you believe this would be done just before Christmas?
Everyone...
8:15 is perfectly right in one sentence:
"I may leave SB but it will not be because of real estate value or the beauty - it will because I cannot deal with the nut balls who live here."
Never a truer statement posted! It has become a "CHORE" to stay in this whacko-city. With, or without property. I'm beginning to hate my formerly beloved HOUSE and the grounds and my trees. Only because they are HERE.
UGH to Ugly Santa Barbarians.
Of course the pro-real-estate folks have coughed up all the traditional hair-balls in favor of the bubble.
It is a simple fact that the stock market is gyrating wildly for the last few months because of all the wild real estate speculation of the past 10 years. There is a very real risk of a global recession due to the crazy financial practices (no-proof mortgage loans for example... did a single real estate agent stand up and say, `Avoid those loans'? No sirree).
A few people losing money? What a joke. Talk about every stock market investor including all the pension funds of the world taking a bath is more like it.
To freeze the interest rates... in the end the paper will be eaten by Fannie Mae or Freddie Mac, and the private banks who wrote or bought the paper will get government payments to make up for lost interest payments caused by freezing the interest rates. It will be all hush hush. In reality, it is just Crony Capitalism from the extended Bush Clan of investment bankers.
Oh, I get it. Japan's crash came from real estate speculation, and our situation is *totally* different: ours is from speculation on real estate. Thanks for clarifying that.
No doubt Santa Barbara will be shielded a bit from the worst of the crises. But anyone who thinks the bottom will come in Jan, 2009 is smoking some leaf. More like Jan, 2015, if we're lucky.
There are hundreds if not thousands of whining homeowners who are really upset that the value of their homes are not appreciating like they did recently. They're nervous and you see them losing their rational minds here. They thought they were so brilliant. When the market has fallen to about 35% of the 2006 peak, that is when to buy, and when the bottom will be finally reached.
And all the local homeowners who lived large on home equity loans (that are now sinking Wells Fargo).... ha! Got what you deserved.
Most homeowners in Santa Barbara are content to stay in their homes.
What happens to the prices of their homes only affects them in the remote abstract. Few are whining about major drops in the real estate market.
They plan to stay put and will sell only when health problems drag them from their homes or the homes pass to their heirs.
Most are whining and complaining loudly about attacks on the quality of their life right here and right now.
City policies affect only a few of the important quality of life markers because many are god-given like the weather, the location and the views.
What they whine about quite rightly are the city council's attacks on over-crowding density, blight, traffic, over-flow street parking, attacks on the zoning code, modifications, lack of police security, vagrants, loss of opens space and open views, noise, grafitti, trash, poorly maintained streets and sidewalks, lack of parks and recreation spaces for the size and diversity of the population.
These qualities of life are under attack by this sitting city council. They perfer to think painting blue lines and resolutions to stop the war and attending out of town conferences will actually help the residents here who have the above concerns.
They learned this last election this is simply not true. They need to take responsiblity as public servents to make sure we are happy and snug and safe in our own homes here first, and then and only then should they even begin to think about saving the rest of the world. But only if we elected them to do this; which we did not.
These are local politicians, not national politicians we elect. They need to keep their noses stuck only in local issues. Period.
SA-1 9:01 p.m.
You are equating the REALITY of real estate investing with the validity of my arguments.
It is not my job to present an in depth and totally comprehensive argument and proof as the the benefits of buying over owning.
What you don't seem to get is that even though I may present a poor argument with a few holes in it, that my shortcomings do not change the reality of the advantages of buying over renting.
I am not spending an hour researching and refining my arguments before I post them. I type what I post off the top of my head as fast as I can type.
You are missing the main point here.
I am not trying to say that investing by buying a house is guaranteed, perfect, or without risk.
The discussion is all about whether it's better to buy or to rent. Those are the two choices. All I am doing is passing along the REALITY that for the last 50 years it has been better for the average american to buy rather than rent. This is because 99% of those who bought made a lot of money in their house as an investment while 99% of those who rented ended up saving very little. Now we are hearing from the 1% who made out better by renting and investing in the stock market. But his argument does not take into account the fact that the vast majority of those who rent simply do not have the discipline and never will have the discipline to save like he did and invest $8000 in the stock market each and every month. The wonderful thing about buying a house is that it's a forced savings program and thats what the vast majority of folks need because they will never do it on their own. yes they can do it but they won't. history has proven that.
Now I have said many times before that buying ones home is a LONG TERM INVESTMENT. And that one is going to lose money over the short term ( under 5 years).
I have also said that there is some risk and there is NO GUARANTEE.
But again the point is that we ate comparing buying with renting and if one is going to hold the house for over 5 years buying is simply better than renting. I had thought that this was pretty much an undisputed fact until one stock broker on Bloga Barbara keeps promoting renting and investing in his funds.
He seems to conveniently forget that the stock market just 5 years ago had a HUGE bubble of its own. The market got over it and so will the housing market. Yes it will take some time but we are not talking about whether or not it's better to rent or buy over the next 5 years. We are talking about, once this current housing correction ism over, whether it's better or not to buy or rent over the next 30 years.
HISTORY REPEATS ITSELF!
ONCE THIS CURRENT HOUSING CORRECTION IS OVER, for the following 30 years it's going to be better to buy rather than to rent.
If you don't want to believe that history repeats itself, fine. See what renting gets you. I know what buying got me. More than my wildest dreams.
The purpose of my words is NOT to sell real estate, but to help people get ahead. The best possible advice is to wait until this correction is over and then buy and hold for the long term. You will be glad you did, and that, not whether or not the wording of my argument is perfect, is all that matters.
HISTORY WILL REPEAT ITSELF.
response to SA-1 9:01 p.m.
You think that you are pretty cute don't you?
Get off your high horse!
You say a hundred things could go wrong, as if thats a reason not to buy a house.
sure, and the sun could explode tomorrow too.
Thats no reason to be impotent and not be able to take action.
I have watched your comments for some time now
and
as to the value of your comments I say;
" No comments from the peanut gallery"
9:43
I agree with much of what you said.
Let me set the record straight.
I do not like the housing bubble. I saw it coming and told al my friends not to buy. I do not, at all, like what the greedy lenders and greedy speculators did and I am not in favor of bailing them out.
Yes, the bubble bursting hurt a lot of people. i don't like that.
But I did not in any way cause all this. And the wonderful concept of owning ones own home did not cause this.
And it does not matter when the bottom hits.
The whole issue here is what's the best thing to do after this correction is over? rent or buy?
All I'm trying to do is one thing and that is to answer that one question. Nothing more.
I'm simply pointing out that this correction is going to create the opportunity of a lifetime for folks that would not otherwise ever be able to buy a house in Santa barbara. I am pointing out how it is a wonderful investment and for the vast majority will be the best investment that they ever made in their lives.
I am not saying it is without risk. it has some risk!
I am not saying it is a good short term investment. it is not. But for the long term ( like 20 years) it is simply the very vest investment that most everyone can make in their lives.
I am not saying it is guaranteed. It is not. I an not saying that everyone can do it. Everyone can not!!!
Only those with a steady source of income can. My whole point is that many who think that they cannot actually can. I was only trying to help them and all I get in return is a bunch of crap.
Now I do not advocate building a lot of new houses here to accommodate those who would like to buy a house here. The exact opposite. I love the town exactly the way it is and I advocate that we preserve our small town character and our quality of life.
Some are trying to advocate that people rent, not because it's a bad investment but because they, like me, don't want to see more homes built here to accommodate the desire of new homeowners to build here. That does not make buying a bad idea. in fact the fact that this is a slow growth community actually makes investing in a home here even a better investment.
The 20,000 commuters provide a pent up demand of potential home purchasers. these folks could have rented here but wanted to buy their own home so bad that they bought in Ventura and put up with the 2 hour round trip commute each day. Now that proves the desire to buy rather than rent. when the prices here drop there are 20,000 eager buyers who will jump all over the lower priced houses.
lastly, I never got around to mentioning before the
most important factor of all and that is the relationship between the historic ration of the cost to rent here with the cost to buy. The housing bubble will have the effect of SIGNIFICANTLY increasing the rent rate here. And as salaries go up 5% each year the rents will go up 5%, or more, each year also. Now once house prices drop to the historic ratio with rents, which will only take a couple of years, the prices of houses will start to appreciate all over again. the most likely scenario is that history will repeat itself, not this latest bubble, but the historic long term rate of appreciation which has been at an average 7% per year which cause the house price to double every 10 years.
So the power of leverage will, once again, make real estate the very best long term investment that one can ever make in their lifetime.
So the best advice is to save your money for a down payment and take advantage of this upcoming opportunity of a lifetime, and buy a house in 1-2 years, at the bottom of the market. 99 out of 100 of you who buy will be very glad you did. It won't work out for 1 in 100. Is that any reason not to do it?
Go for it!
Good luck.
A cautionary note: When and if you buy, do your research on the neighborhood and make sure it's not targeted by developers to change it beyond all recognition. I was lucky enough to "get in" back in the early 90s, and my home has appreciated in value greatly. But I never imagined the hearbreaking amount of time and effort it takes to have legitimate neighbohood concerns addressed by our agenda-focused staff and council who dismiss very serious quality of life issues as though they're meaningless. To them they are. Look at how they hand out modifications--zoning violations--for all their friends and pet projects. Nice (and appreciative) to own, but the neighborhood now, not so much.
Sorry, Nosy. I've been busy.
Watch the paper. Any paper. The Resolution will be in print soon or at least the essence of same.
The MEETING at council chambers is 12/18 so just call city hall and they will tell you - that is, if they don't lie. Turns out a "staffer" to Das Williams screwed up on the original email and he had to apologize and correct the "subject." The new subject is Cessation of Combat in Iraq. An insider to staffer erred by saying, "And the Impeachment Resolution is next, right?" (paraphrased that quote but it is accurate in content.)
The emails are really flying on this issue right now. Oh the fun -and I noted someone here wrote two paragraphs on the City doing local rather than national business that you should have seen so I guess he/she knows what I do as well.
Funny, guru 12:57pm, on the one hand you argue that now is the time to save for a down payment.
But elsewhere you argue that it impossible for Americans to save at all. Which is it?
If you can save for a downpayment now, then you can rent and save and invest your savings.
I've never said buying was a *bad* investment. It's just that the data and my investing experience clearly shows that renting *AND INVESTING* (not just renting) outperforms buying a house by a small amount.
Renters take heart, but get investing in low cost index funds.
Ok Guru,
I get it. You're just trying to make a general point and don't want to be bothered with details.
Lets try one though. If it takes 20 years (15, 10) or whatever, why is the average owning period 7 years? What does this do to the eventual return when factors of brokerage costs are involved coupled with the fact that one of those seven year periods is one of the down market times?
Here's another I don't get. Why do RE sales folks keep telling the San Roque lookers that it makes sense to pay $500,000 more for a 1100 sq ft 60 yr old home when you can get a bigger lot and newer 1800 sq ft home in Goleta within walking distance to the beach? I'm just askin', what does that sales pitch sound like?
In my view, the whole point of life is not to see how much wealth you can accumulate on paper but how much you can enjoy each day and that is kinda hard to do if you dump all your hopes, dreams, income and risk into one basket because in the long run...we're all dead.
Buying a home is indeed a smart and rewarding plan if it works for you. Buying a first (especially)home in SB is perhaps not a good idea unless you're really sure you can stick around long enough and with the job picture in this town being what it is, I would suggest anyone under 35 to find a good paying job wherever it is buy a reasonably priced home if you want (not a $650K condo) and come back when you've amassed the capital to buy in at 30% so your lower payments and equity can shield you if your timing is not quite right.
Ok sa1
You're putting words in my mouth. I never said I don't want to be bothered with details. What said was that I don't have the time to put together a comprehensive and complete and perfect argument. All I have time for is to put together a few off the cuff remarks each time I write. Its not my job. The point being my shortcomings don't change the fact that buying a home is better than renting IF ONE CAN AFFORD IT AND IS GOING TO HOLD IT FOR OVER 10 YEARS.
Now you are right about the 7 year average owning period. But all this means is that those half selling before 7 years are not going to make much, if any profit, But those half keeping over 7 years are going to make a huge appreciation due to the leverage on their investment. But your point is well taken---the average time needs to be increased to 10 yeas and that means that those who do not plan to hold 7 years should not buy at all.
As to your second question. You have it slightly wrong. It is not the agents who are pushing for San Roque but the buyers. I have been a broker here for 27 years since 1980. I always tell all of my buyers that I recommend that they consider buying in Goleta because one can get twice the house for the money. I swear to you that 95% of all buyers respond by saying that they want to live in Santa Barbara and not Goleta. Nobody wants a tract house and everybody wants character. But in this issue I agree with you completely.
Next issue: I agree with you totally that the whole point in life is not to see how much money one can accumulate. the whole point is to have a high quality of life.
There is nothing at all wrong with renting. In my life I have rented 5 homes and purchased 4 homes.
But the unfortunate reality is that it costs money to live and even though money can't buy happiness it sure can one one a better or pleasurable life. As long as one leads a balanced life and doesn't make making money ones main goal or activity.
I only push buying a house, not to make a commission, but only because it has been my experience that the vast majority of renters simply don't save and invest (as they should). But I noticed long ago that buying a house is in effect a forced way of savings. In addition to providing shelter and a fixed monthly payment and tax benefits, the power of leverage house becomes a wonderful investment IF HELD FOR A LONG TIME (over 10 years).
The power of time produces simply amazing results in any compound investment where the whole principle and interest is kept in and re-invested each year at a compound rate. As a schoolboy I say the example of how one penny doubled each year, with the new amount left in to double each year, for 100 years, accumulates to something like $1,000,000.
The stock broker who keeps writing in and advocating that folks rent and save and invest in the stock market is actually right. IN THEORY. But there is a huge fatal flaw in his argument, and that is human nature. americans simply don't save! this is a fact. The average rate of saving in america is 1% of ones income.
Now this is a national tragedy. Everyone should budget there money and save 10% each month no matte what.
But lets accept reality that they simply don't. So buying ones own house is about the only way one is forced to keep up the investment. Ones house in effect becomes ones savings account.
All I know is that it works and works well! And I am speaking from vast personal experience. Not to brag, but to illustrate from a real life example, I turned a $3,000 cash down payment ( every cent I had in the world) in my first house here in 30 years ago in 1977 into well over $2,500,000 equity at the peak and well over $2,000,000 now. I mention this only as an illustration of just how powerful it is.
Over the last 30 years I only made an average of around $60,000 per year, and if I had rented, saved and invested the difference in my house payment above rent these last 30,years all I would have built up from my original $3000 would be somewhere around $300,000 after taking into account my savings on income tax by owning. And at his time to rent a comparable house would cost me double my house payments.
There is simply no comparison.
Also at this time my house equity is appreciating an average ( when taking into account a 10 year period both the correction years and the appreciation years) of $200,000 per year . So my house, in effect, is making me much much more than my salary. and I expect my equity to grow another $2,000,000 over the 10 years following the bottom of the correction.
And I didn't mention that, years ago one point along the way, I refinanced and pulled out enough tax free cash to purchase 48 apartments. I know others who refinanced and bought a business.
Lastly I agree with you that condos are a poor investment . I always advise only buying a house not a condo, condo's suck!
From today's NY Times...
``Mr. Bush will also ask Congress to temporarily expand the authority of states and localities to issue tax-exempt mortgage-revenue bonds to help people refinance their mortgages.''
Excuse me, why are we excusing bonds that help folks who were financially irresponsible from taxes?
Add that to the subsidies that homeowners enjoy... the mortgage interest tax deduction is the biggest, about $100 billion/year.
Now add the taxpayer-subsidized bailout of financially irresponsible sub-prime lendors.
``Senator Barack Obama of Illinois jumped ahead of many of his Democratic presidential rivals in September with detailed recommendations that included a government rescue fund, changes in bankruptcy law and a new tax credit on mortgage interest for people who do not itemize their taxes and cannot currently deduct their interest payments.''
Other than Obama fleecing the taxpayer to help the irresponsible, note another thing: folks who purchase low-priced homes and aren't affluent get a much smaller mortgage income tax deduction because they can't itemize.
Another way the rich homeowners of Santa Barbara get a fat government subsidy denied to those less affluent.
And as soon as they finish doing their taxes and claiming their huge government subsidy, they head to the local public meeting and shout down affordable housing as a government subsidy.
Sorry guru, you are wrong about renting and saving and investing.
You'd have over $2.5 million, totally liquid, if you had assiduously rented and saved over the past 30 years.
I know... I've saved and invested and have $1.2 million over the past 20 years.
You are pretty innumerate and irrational about evaluating the renting/saving/investing option.
I agree purchasing a home is a good way to save. But as you point out, condos are a bad deal, and guess what... most folks starting out can only afford a condo.
They won't ever see the appreciation that you are talking about.
It is way better for young people to rent, save, and learn to invest.
Now real estate agents, sadly, encourage them to be spendthrifts by failing to reinforce the important message that saving and investing is how you build wealth in America.
That's another reason why real estate agents should be fined and jailed for the current sub-prime mortgage mess, which has turned 3 million families out of their houses over the past 3 years.
Real estate agents have no conscience, morals, or ethics. If we don't throw them in jail we should arrange a 60% income tax on them. And make their car registration fees be 10X that of everyone else.
But now.. the real estate industry has lobbied to get massive public bailouts. (See the last post).
Better yet... send them all to Iraq to work on the reconstruction.
5;12 a.m.
If you can't lick em, join em!
Instead of complaining about how good the homeowners got it, why don't you become one and get your share of the outstanding benefits.
"Power to the homeowners!"
8:30 a.m. Somebody said you are a stock broker.
I agree .
Nobody but a stock broker would tell people to not buy a house but rent and invest the difference in the market.
Only tropuble is that after 10 years there is no longer any difference because rents have doubled and are now the same as the house payments. and the following 10 years the renter will have to rtake out all that money he saved just to pay the increases in monthly rent.
The whole theory of renting and dsaving is nothing but a misguided MITH by a misguided stock broker who never actually did it himself but only did it on paper and now claims that he did it to strengthen his argument.
I'd like to tell him what he can do with his faulty "theory".
Some want to get rid of a lot of our middle class. The best way is to tell them that they can move away and buy a house and they can move back to Santa Barbara 10 years later and buy a house here with the $500,000 that they have accumulated elsewhere.
YEAH RIGHT!
In 10 years that $750,000 house is now $1,500,000. OOPS!
It's down payment has jumped from $150,000 to $300,000 OOPS!
It's payments have now jumped from around $3000 on a $600,000 interest only loan @ %6% on $600,000 to around $6,000 payments on an 6% interest only loan on $1,200,000. neither OOPS!
Can't afford $6000 monthly payments?
Guess you can't move back! SO SORRY.
Don't let the door hit you on the way out.
Featured report in the Wall Street Journal says home sales in Santa Barbara remain solid, compared to the rest of the country.
So those claiming the bottom is falling here and there will be no buyers at these prices need to know what the reputation of Santa Barbara housing is as seen by the rest of the wealthy readers of the WSJ who may be looking for depreciation proof home investments.
Quote: California sales activity plummeted over 40% this past October from a year earlier, the median prices fell 9.2% in the same period ......But prices in the city of Santa Barbara, near Montecito, rose close to 25% tp (meidan) $1.28 million from a year earlier.
Unquote:(12/7/07)
NB: You should have bought that $450,000 condo afterall. Thw WSJ reaches a lot of national and international readers looking for place to live and invest. Move fast if you want a piece of this action, any action in this town.
It is not dying and will not depreciate because it is special and rare. And smart money senses the political shift that is also taking place to become more protectionist, rather than destructive of its unique character.
When you realize the role Santa Barbara plays on the worldwide recognition stage, you realize how petty local wankers are and how much envy and lack of their own long-term planning plays in their malicious comments about getting their own piece of the Santa Barbara home owners market.
They keep waiting for the Tooth Fairy(Thank you Tom Friedman in his excellent NewsPress column toay) to hand them a house, while very year the market reaches further and further out of their grasp.
As long as we are swapping stories:
We bought a modest home in Mission Canyon just 5 years ago for $500,000 with $50,000 down, mostly borrowed from relatives.
Today it is worth $1,000,000 even after dropping 20% in the correction.
We are just thrilled at how it worked out beyond our wildest dreams. To turn $50,000 into $500,000 is just amazing. The best we could have done in the stock market is to have made 100% over the 5 years. (15% per year) $500,000 is a far cry from $50,000.
We can't speak for others, but as far as we are concerned there is just no comparison between buying a house and renting.
Our advice to renters is to take advantage of this correction to buy. Prices will never, EVER, again be as low as the bottom of this correction. It's your last chance. Take advantage of it! You will be forever grateful that you did.
The inception of the VFINX fund was 8/31/1976, the Vanguard Website.
VFINX Price 12/87 - 15.04 (see this link).
VFINX Price 12/07 - 139 (see this link).
Annualized rate of growth is 11.8%.
1987 median home price on South Coast - $260,769. (Source: Santa Barbara Multiple Listing Service).
Latest 2007 median home price on South Coast - $1,260,000 (link to the source at SBAR).
Annualized rate of growth is 8.2%
Condo Market - 6.8% over the last 20 years ($168,900 in 1987, today $630,000).
Investing in a broad market index fund has brought better returns than investing in Santa Barbara South Coast housing over the past 20 years. Luckily I invested in the VFINX broad market fund and turned my $50,000 + $800/month into $1.2 million.
It would be great if you could post the APN numbers of the properties you mention.
It is a simple fact: renting +saving+investing is financially superior to purchasing a house in Santa Barbara. For the rest of the US, the renting+investing is even better, because historically housing prices have tracked inflation. See this link.
One exception might have been flipping houses, but that isn't working anymore. And for every house flip story, there are many more stock market deals that make more money. I don't advocate frequent trading, though. I advocate broad market index funds, because I'm not a stock broker.
There is only leverage if you flip houses. For those of us who stay in the same houses for more than 10 years, there is no leverage.
Real estate agents who want to stampede people into buying post here a lot. Sure would be great if they provide links and other info to document their claims. They can't.
That is because it is truly, really, definitely financially superior to rent, save, and invest your saving prudently. It isn't much better than buying a home, and if you want to dig a hole or knock out a wall, go ahead and buy a home.
"The 20,000 commuters provide a pent up demand of potential home purchasers. these folks could have rented here but wanted to buy their own home so bad that they bought in Ventura and put up with the 2 hour round trip commute each day. Now that proves the desire to buy rather than rent. when the prices here drop there are 20,000 eager buyers who will jump all over the lower priced houses.?
This makes no sense to me. When the SB prices go down, won't the Ventura prices go down as well? How will the Ventura home owners all of a sudden be able to purchase a SB home without selling their own home at the same lower rate?
In the mid 1990's I rented a very old, charming funky 2 bd/1 bth with a bit of a yard for $1,200.
A few years later when my job & income allowed, I borrowed a small amount of $$ from family, bought a smaller, older, 2bd, 1 bth teensy home on a speck of grass. Two years later I sold that house for twice the amount I bought it for. Then I bought a larger house on a few acres which was a monthly stretch for my income so there were no frills in my life.
5 years later, I sold that home for more than twice of what I paid for it for, & bought a home twice the size with less land about 30 minutes outside of SB in a quiet rural community that reminds me of what SB used to be like when I first moved there.
My current mortgage is about the same as the rent I once paid on the house mentioned in the first line. Yes, I have property taxes but also tax right offs.
If my property eventually appreciates, great! If not, I'm paying about the same monthly payment as I was paying out for rent about 15 years ago- on a really nice home that I own at a low fixed mortage rate.
I wasn't flipping homes, I intended to stay in each place for a long time but circumstances led me to the selling/buying. I feel very fortunate it all worked out & am another great testiment to why buying, not renting changed my life beyond my wildest dreams.
9:48
You're still ignoring leverage.
Leverage turns the house appreciation into 35% per year on the down payment.
This beats the stock market!
You lost this argument, my friend. Give it up already!
Wow, 1:54am, show me where you can purchase a home for only the down payment without making mortgage loan payments.
For those of us who must make mortgage loan payments, they (and the down payment) amount to overy twice the purchase price of the home... even after the mortgage interest tax deduction.
Leverage usually means you pay less than the purchase price but et to keep the appreciation.
For everyone except 1:54am who need not make mortgage payments, you pay substantially more than the purchase price and so there IS NO LEVERAGE.
I think you can see the pattern of the pro-real estate folks. They just repeat themselves and fabricate stories without APN's. After repeating themselves again and again without documentation, they declare that they have won the argument.
Only simpletons would trust such people.
Whatever specious things they say, the facts remain the same. Financially, you do better renting and saving the difference between home ownership costs and your rent.
Home ownership costs have escalated relative to rent since 1940. Home prices were 9X annual rent in 1940, in 2005 home prices are 20X annual rent nationwide (here is my reference). In Coastal California, home ownership costs are now 30 times annual rent. (here is my reference).
Pro-real estate folks gave us the current mortgage mess. They may have tanked the US economy for 10-20 years like they tanked Japan's economy since 1990. Use your noggin and don't trust them.
Everyone still ignores the years living in your home "rent-free" after the last mortgage payment is made.
That too is a priceless advantage of owning, and doing it early enough in your life to really reap substance from this benefit.
9:48 p.m. Hey dude,
I opened your fund link and IT says that the last 10 years the average appreciation was 6.49% per year.
People who bought a house had the house more than double, so their appreciation on their 20% down payment went up 500% over his 10 year period, while your fund went up LESS THAN 100%.
So during the last 10 years, buying a house beat renting and investing in your fund by 500%. (5 times the return!) This is due to leverage because the 20% down payment controls an investment five times the amount of the down payment.
Dude, why don't you take a basic math course. You are embarrassing yourself big time! Also, it is becoming obvious that you either don't understand the concept of leverage, or you do and don't want our readers to.
12;46
To answer your question. Once the prices of Santa Barbara homes go down these commuters, due to their high Santa Barbara salaries, ( yes they are very HIGH or folks would not be commuting), can now afford to buy one even if they didn't already have a home in Ventura. So the home in Ventura is not needed at all. all they have to do is keep their home, rent it out to make the payments, take out a $100,000 equity line loan to use for their down payment and buy in Santa barbara. Now they own 2 houses and both of them will double over the next 10 years and they will be rich.
This is NOT theory as I have personally know several folks who did just this before the bubble burst so it it worked then it will work now.
Or folks can sell and use their equity as the down payment of their house in Santa Barbara.
Now how about the savings that was achieved by their moving away to a cheaper place and allowing them to save the difference in their housing cost, as compared to Santa Barbara, and invest it in the stock market. They can pull out this money and use for a down payment.
Oh, you say they didn't save. Now what does that say as to the stupid theory that it's better to rent here in Santa barbara and save and invest the savings in the stock market. Because the cost to rent in expensive Santa Barbara is the exact same as the housing payments for those who bought a relatively cheap house in Ventura.
The fact that the declining market lowered the value of their house and they gave up part of their paper profits has absolutely nothing at all to do with the fact they can now afford to buy in Santa Barbara because the new lower monthly payments now are afforded by their high Santa Barbara salaries, where before they weren't.
As long as everybody is sharing their story I'd like to share ours.
30 years ago we bought a Goleta track home with our life savings of $10,000 as the down payment.
7 years after that, when it had appreciated, we refinanced it and kept it as a rental. pulled out some equity and bought a nice brand new house in Ventura.
7 years later. after it appreciated, and after we got REAL tired of the commute, and our kids grew up and moved away, we repeated the same process and refinanced it , rented it out, and bought a brand new luxury condo in Santa Barbara. Now we had 2 rental houses and the Goleta one was bringing in a positive cash flow.
Five years later we both retired, at age 50, and decided to move out of town to retire. So we refinanced the rental house in Goleta and bought our dream home out of town. Now we had 3 rental properties and the one in Ventura started making some positive cash flow.
Last year, After 3 years out of town, we missed Santa barbara so we rented out our new dream house, refinanced the Ventura house, and bought a very nice house in Santa barbara and moved back. We now own a total of 5 houses. The one we live in plus 4 rentals; Goleta, Ventura, Santa Barbara luxury condo and out of town dream house, and all 4 of them are now bringing in a positive cash flow. We just refinanced the condo, pulled out $100,000 and helped each our two girls each buy their own house by giving them the down payment. And we refinanced the Out of town dream house and bought a house here for my wife's mother, who had been a renter, so she could move here to be near us.
So buying the one modest home in Goleta 30 years ago gave us the possibility to now have a total of 8 homes, including our 5, the 2 for our children and the 1 for our mother.
We did all this as typical ordinary middle class folks on a household income of $100,000 per year and without having to put a penny of money in other than our original $10,000 and our regular monthly payments which were similar to what it would have costed to rent the equivalent house.
We could not have done all this by renting.
And now we have a combined equity of just under $4,000,000, and a significant rental income positive cash flow of around $3000 per month, all due to our making the decision 30 years ago to buy instead of rent. At that time we didn't think that we could ever buy a house, but we stuck our necks out and did it. It is amazing how the leverage inherent by investing in buying a home can in just a few short years change from being a financial sacrifice into an investment with the potential to do something like we did.
In 15 years all the houses will double in value which will add another $5,000,000 to our net worth. all because of one $10,000 initial investment.
Doing what we did is just not remotely possible by investing $10,000 in the stock market.
And, looking back at it, it really wasn't all that hard, in fact it was really quite easy. All it took is one thing: Having the Balls to try it.
If ordinary folks like us can do it you can surely do it too.
Interesting discussion.
I never thought through the renting option, but going through the numbers makes it look interesting.
If that guy had bought at the SB median prices of $260K in `87 with a $50K downpayment, he'd have paid a total of $560K in the last 20 years on mortgage payments and house upkeep, accounting for the mortgage interest tax deduction. His house would be worth $1.26 mill, and so his profit would be $654K.
But renting and investing the downpayment and $800/month in that Vanguard fund, he'd have payed $398K in rent in 20y, and his investment is worth $1.2 mill or so. So his profit is $708K. But he'd be hit with the capital gains tax if he sold his mutual fund, so actually his profit would only by $535K, so the house purchase beats him by $120K.
But after 30 years, in 2017, the renter pulls out ahead... home owner makes $1.8 mill while the renter $2.3 mill. But the renter has to keep paying rent and the homewowner no longer makes mortgage payments! Homeowner still must pay his insurance and upkeep though.
Well, look in on them after 20 *more years*, in 2037. The homeowner has made a profit of $12.6 million and feels quite smug about not having to pay mortgage payments for 20 years, and chides the renter about the $1.3 million in rent payments that the renter has made in the past 20 years.
But the renter replies, hey, my stock market investment in VFINX has now made me $26 million! More than double the homeowners' profit!
Personally, I like owning my own home. If there is a lesson here, it is, regularly and patiently invest in the stock market.
But I'd never realized that renting and investing actually does pretty well.
11:58am When you look at the last 200 years, the stock market averages 10% a year. Any 10 year interval may see more or less. Here is a link describing Prof. Siegel (of Wharton)'s book.
In the last 100 years, according to Prof. Shiller, real estate in the US has been pretty much flat when corrected for inflation (about 3% a year). Here is his plot. There has been a bubble since about 1995, which he predicted in 2005 would pop... we are seeing the pop now.
If real estate declines to historical levels, expect prices to go down about 45% from their peak. So far prices have fallen only 10% from their peak; we've got 35% to go, and that will take at least 3 more years.
Prof Shiller designed the Standard&Poors US Housing Index. You can get inflation data here.
One thing about all these stories about real estate riches... the posters never give the APN's of the property involved. That is why the are most likely fabrications.
2;55 p.m. numbers guy
From what you say it is obvious that you are the same guy as the guy who keeps promoting renting and investing in the index fund. You both are one in the the same guy.
You tried to be cute and start your latest discussion with the words; I never thought through the renting option but going through the numbers it looks interesting.
Did you really think you could fool us when the rest of what you say is the same old BULL.
My friend, your math is simply way off. You do not properly increase the rent by 5% compound per year!!!
You insist on considering the mortgage payments as part of the investment instead of the equivalent to rent.
you don't properly consider the income tax savings. you don't properly consider the rent the renter has to pay after the 30 ,year period when the buyer has his house paid off.
From your latest message it is now clear to mew that you simply don't properly understand the reality that there is considerable leverage the first 15 years of the mortgage that allows the buyers appreciation on his cash to get a jump start on the stock market by 5 to 1 which means that the stock market can never catch up. From your latest discussion it is obvious that you are totally ignoring the leverage.
The stock fund investor has no leverage so his $100,000 goes up 10 % the first year to $110,000
While the home-buyer's $100,000 controls a $1,000,000 house which goes up 7% to $1,070,000. So subtracting his $900,000 loan leaves him with $170,000 at the end of the first year compared to the $110,000 stock investor.
So the buyer is now $60,000 ahead of the renter/stock investor.
Now lets look at the second year; The stock investor has $110,000 plus $12,000 saved by having lower rent payments less the $2000, that his rent went up, which totals $120,000 plus the 10% or $12,000 which gives him a total of $132,000 at end of year 2.
The buyer now has a house worth $1,070,000 which appreciates another 7% or $74,900. So his house is now worth $1,144,900. So, after subtracting his loan balance which is now paid down to $895,000 his net equity is now $249,000 as compared to the $132,000. Plus he has just saved $5000 in his income tax.
lets compare the profit:
Renter/stock investor: $132,000-$100,000= $32,000 profit which is 32% total profit so far.
Home-buyer: $249,000 -$100,000= $149,000 profit plus the $5000 income tax savings which brings it to $154,000. 154% total profit so far.
The buyer is now $122,000 ahead of the renter.
I could do this for every year, and the homeowner just keeps getting more and more money ahead of the renter. The renter never catches up because his rent keeps increasing by 5% COMPOUND per year which double it every 14.4 years. so over the 30 year loan the rent goes up 4 times while the buyers stays the same so the amount that the mortgage payment is higher than rent at the beginning can be fully allocated to rent over the 30 year life. this allows the leverage of the down payment to exist and not be taken away by the mortgage payments because over the 30 years they are not more than the rent would be to be able to live in the house.
SUMMARY: IN THIS DISCUSSION THE LEVERAGE ADVANTAGE OF THE BUYER OVER THE RENTER IS EVERYTHING, and to ignore it is to come to a faulty conclusion.
As for my credibility: I have an IQ of 140. I have an advanced 6 year degree of University education and got straight A's in Calculus at the university as well as straight A's in all my other high school and college math classes. I am a real estate broker with extensive classes in investing of all types. experience.
I also have 40 years extensive experience of sucessfull investing in BOTH real estate and the stock market. In 40 years I have NEVER lost a penny in real estate while making a huge amount of appreciation, while I sure have lost in the stock market from time to time, and made extremely less over the same 40 year period with about the same amount of capital invested. So I speak from 40 years of extensive experience of actually doing both. I assure you, and would bet my life on it, that this character is simply wrong, and refuses to accept it, because he has an agenda of trying to get you all to buy stock instead of a house.
I am not trying to sell you a house but I am trying to prove him wrong because it frustrates me how he is repeatedly passing along such bad advice to you readers, in spite of my proving him wrong with actual case numbers. He is using faulty math by totally ignoring leverage. I couldn't care less what he personally does, as long as he doesn't steer you wrong. This crackpot is driving me absolutely nuts with his repeated faulty math and reasoning. I hope you all can now see through his faulty math. I sure can.
Anon -- no worries, will keep on going.
Other Anon who called a commenter a YABBADABBA -- please don't do that! It's not necessary -- the rest of your comment was fine.
I push buying a house over renting because it has been my experience that the vast majority of renters simply don't save and invest (as they should). I noticed long ago that buying a house is in effect a forced way of savings. In addition to providing shelter and a fixed monthly payment and tax benefits, the power of leverage house becomes a wonderful investment IF HELD FOR A LONG TIME (over 10 years).
The power of time produces simply amazing results in any compound investment where the whole principle and interest is kept in and re-invested each year at a compound rate. As a schoolboy I say the example of how one penny doubled each year, with the new amount left in to double each year, for 100 years, accumulates to something like $1,000,000.
The stock broker who keeps writing in, ad nauseam, and advocating that folks rent and save and invest in the stock market is actually right. IN THEORY. But there is a huge fatal flaw in his argument, and that is human nature. americans simply don't save! this is a fact. The average rate of saving in america is 1% of ones income.
Now this is a national tragedy. Everyone should budget there money and save 10% each month no matte what.
But lets accept reality that they simply don't. So buying ones own house is about the only way one is forced to keep up the investment. Ones house in effect becomes ones savings account.
All I know is that it works and works well! And I am speaking from vast personal experience. Not to brag, but to illustrate from a real life example, I turned a $3,000 cash down payment ( every cent I had in the world) in my first house here in 30 years ago in 1977 into well over $2,500,000 equity at the peak and well over $2,000,000 now. I mention this only as an illustration of just how powerful it is.
Over the last 30 years I only made an average of around $60,000 per year, and if I had rented, saved and invested the difference in my house payment above rent these last 30,years all I would have built up from my original $3000 would be somewhere around $300,000 after taking into account my savings on income tax by owning. And at his time to rent a comparable house would cost me double my house payments.
There is simply no comparison.
Also at this time my house equity is appreciating an average ( when taking into account a 10 year period both the correction years and the appreciation years) of $200,000 per year . So my house, in effect, is making me much much more than my salary. and I expect my equity to grow another $2,000,000 over the 10 years following the bottom of the correction.
The person advocating to rent and save is simply ignoring leverage where for the first 15 years one controls an asset which is appreciating with a much smaller amount of cash. So while the stock investor is controlling say $100,000 worth of stock going up 10% a year the home-buyer for his sam,e $100,000 cash down payment is controlling $1,000,000 worth of house appreciating at 7% per year. So while the $100,000 stock made $10,000 the first year the house went up $100,000 so the $100,000 down payment went up 100,000 which is 100% return cash on cash invested. so the house investment makes 10 times as much as stock the first year ... and this just keeps tight on going year after year where the house investor makes 5 times as much as the stock. The one person advocating, over and over again, to rent instead of buy, tries to allocate the entire amount of the mortgage payment as money invested. THIS IS NOT MONEY INVESTED BUT MONEY PAID AS THE EQUIVALENT OF RENT. While the mortgage is more than rent the first few years, the first few years, the mortgage payment stays the same while the rent increases 5% compound each year which makes the rent 4 times the house payment at the end of 30 years, So over the 30 years the grand total house payment equals the grand total rent. so the payment does NOT negate leverage like this idiot is trying to get you to believe.
I don't ignore leverage. I inflate both rent and the maintenance/insurance portion of the homeowner's costs at 4% a year.
Assuming 5% a year doesn't change the answer very much.
My starting numbers for 1987: Renter pays $1,000/month rent (inflates to $2200/month in 2007), and saves $800/month and invests it in that Vanguard S&P 500 Index Fund. Puts $50K in Vanguard account.
Homeowner buys the 1987 median house at $260,000 with $50,000 down payment and $210,000 loan.
Homeonwer pays: Mortgage-mortgage income tax deduction+Prop Tax of $1413/month (no inflation) + $387/month in 1987 which inflates at 4% a year, total in 1987 of $1800/month (same as renter). In 2007, homeowner pays $2260/month, which is pretty close to what renter pays.
Because of leverage, and because the renter must pay capital gains tax to get their money (and the homeowner does not up to $500,000 profit assuming they are married), the homeowner is ahead until 2006. Thereafter, the renter/saver/investor beats the homeowner. A table is below, showing how the $50K invested initially grows for the two chaps.
The most clever move for the homeowner would have been to sell out in mid-1994, after about 7 years of paying the mortgage. That's when the power of leverage works best for the homeowner, and they have a 29% advantage over the renter. If they then moved their money from their home to the Vanguard fund and rented thereafter, they'd end up about $740,000 richer than the renter.
We see why flippers prosper by leverage. Not sure flipping will work the foreseeable future outside of Montecito and Hope Ranch, though.
At retirement, the best move is to liquidate your home assets, invest them, and rent thereafter. Your money grows faster in broad market funds than in real estate, even in Santa Barbara.
For most of the US, there are not the same 8.2% annual real estate returns you see in Santa Barbara. So, for the rest of the US, it is way, way better to rent and not buy. Real estate in the rest of the US appreciates at 3-4% a year.
Here is the table:
Year Renter Homeowner
==== ====== =========
1987 $ 50.0K $ 50.0K
1988 53.5 57.3
1989 57.6 64.8
1990 63.4 74.7
1991 70.7 84.4
1992 79.9 100.2
1993 91.0 116.1
1994 104.4 134.4
1995 120.5 155.2
1996 139.5 178.8
1997 161.8 205.5
1998 187.9 235.4
1999 218.4 268.9
2000 253.6 306.2
2001 294.4 347.8
2002 341.2 393.9
2003 395.0 445.0
2004 456.6 501.3
2005 527.0 554.1
2006 607.3 612.3
2007 698.7 676.4
2008 802.6 746.7
2009 920.6 824.0
2010 1054.3 908.6
2011 1205.6 1001.3
2012 1376.9 1102.6
2013 1570.4 1213.4
2014 1789.0 1334.5
2015 2035.5 1466.6
2016 2313.5 1610.7
2017 2626.7 1767.7
2017 2516.1 1725.0 (5% rent/maintenance/insurance annual inflation)
PS This is my second post ever at Blogabarbara.
7:23
You are just plain wrong when you say real estate is going to drop 45% from the peak with 35% to go.
NO WAY JOSE.
I could see the stock marker dropping 50% in any given year but not houses. The most they can drop is 30% from the peak and while high end Montecito houses here have not dropped at all Santa Barbara and Goleta tract houses have already dropped a full 20% already, so only have 10% and one year to go.
I will admit that the bottom might be followed by one or 2 flat years of maybe 1% appreciation but after that it is ALMOST a sure thing that they will double the following 10 years. a lot more of a sure thing than the volatile and unpredictable stock market, where only the big guys make a "killing" while all the little guys get "skinned alive".
My pappy always told me; "Son, a fool and his money are soon parted."
Stock brokers standard motto is ; "Churn em, and burn em!"
I've deleted a couple comments recently for someone using personal invective -- let's not call each other names!
Thanks Sara, no invective from me.
The real estate guys are driven nuts by anyone pointing out that they are not the only way to accumulate significant riches. My father always told me, `It's hard to convince a man of a fact when his livelihood depends on him believing otherwise.'
I've never said, ever, that buying a house was a terrible investment. You do build wealth. But, my point is, buying a house is not the royal road to wealth. You can rent and if you discipline yourself to save the difference between rent and house purchase expenses (including mortgage payments, taxes, and upkeep) you can end up at least as wealthy as a homeowner.
I am not a stock broker or involved in the investment industry. That is why I use broad-market investment funds from places like Vanguard and Fidelity. Stock brokers hate those funds because they avoid the `churn em, burn em' ethic of the stock broker. Read `A Random Walk Down Wall Street' by Burton Malkiel or any of the books by John Bogle.
`Numbers guy' did us all a service by laying out some numbers. Note, the real estate folks have done nothing of the sort, they just keep apoplectically throwing flame posts.
Does anyone really want to trust them concerning a $1 million deal? They behave very badly.
But I think even numbers guy got it wrong.... she (or he) forgot a *HUGE* expense homeowners must pay:
THE 7% REAL ESTATE COMMISSION.
There is `reverse leverage' on the commission... you pay it as a portion of the entire price of the house. And you pay it twice... once on purchase, and once on selling. That commission is why real estate agents want you to purchase a house. If they really believed that a house was a great investment and good for you they'd operate on a 0.2% commission like the Vanguard and Fidelity funds do.
And BTW, numbers guy messed up a second time. Property tax does not stay fixed, but increases at 2% a year.
But at least numbers guy tried. Unlike the real estate folks.
Small wonder the real estate folks got the US and global economy into its current huge mess based on mortgage based securities, ARM's and no-verification loans.
As for the popping of the bubble, I think US real estate prices will fall another 35%, after correcting for inflation. It will be spread over 3 or 4 years, over which time inflation will contribute 10-15%, and so it will look only like a 20% or so decline. Hey, the 1990's decline lasted 6 years.
12:37
Your table uses faulty math.
you failed to take leverage into account.
lets look at buying a home in Santa Barbara today:
buyer pays a 10% $100,000 down payment on a $1,000,000 house. renter invests that same $100,000 in the stock market.
Now one year later the house has appreciated 10% which is $100,000. So the $100,000 invested in buying has just made a $100,000 100% profit while the renter just made 10% of $100,000 or $10,000.
The buyer made ten times as much as the stock investor due to his leverage of 10.
Now lets look 7 years down the road; the house which appreciated 10% per year (use the Santa Barbara rate not the national rate)had doubled to $2,000,000. so the buyer just made $1,000,000 on his $100,000 investment of 1000% profit.
while the renter just doubled his $100,000 to $200,000 for a profit of $100,000 or 100%.
so as you can plainly see the buyer due to his leverage of 10 has just made 10 times the profit as the stock investor.
The leverage is built into the real estate investment. it is a reality. it exists. it produces results as shown above. Therefore it simply cannot be dismissed with some statement that there is no leverage. If there were no leverage the house investor would have only made $100,000 instead of $1,000,000. how do you account for that/ Voodoo math?
Now the most important point to remember about a
house investment is that its not just an investment but a COMBINATION investment and providing shelter equivalent to rent. if one were not buying one would be renting an equivalent house. Therefore that portion of the grand total monthly payments equal to what the rent would be over the 30 year life of the loan has to be attributed as shelter (rent) expense and not as part of the cost of the investment.
Now lets look at a comparison of the house payments over 30 years and the rent over 30 years.
it is a fact that Santa Barbara rents increase 5% compound rate per year. ( Ignore the national average of 4%) . per the rule of 72 one can determine the number of years that it takes to double by dividing 72 by the rate of appreciation. 72 divided by 5% is 14.4 years. This means rent in Santa Doubles in 14.4 years while the mortgage payments are fixed and stay the same.
so even though at the start the house payments are exactly double what it would cost to rent that house. 14.4 years later the rents have caught up , and are now the same. But another 14.4 years down the road ( a total of 28.3 years from the purchase date) the rents double again and are now double what the monthly payments are. so over the life of the loan the grand total rent is exactly equal to the grand total house payments. So this proves that 100% of the house payment over 30 years is the exact same as the total 30 years rent and so 100% of the house payments can be attributed as shelter living expense rent equivalent. And none of the payments need be attributed to the investment expense.
Now lets look 28 years down thee road. The house has now doubled in value FOUR times to $16,000,000
1. year 1 to 7: $ 1,000,000 to $ 2,000,000
2. year 8-14 : $ 2,000,000 to $ 4,000,000
3. year 15 to 22 $ 4,000,000 to $8,000,000
4. year 23 to 28 $ 8,000,000 to $16,000,000
while the stock has also doubled 4 times:
1. $100,000 to $200,000
2. $200,000 to $400,000
3. $400,000 to $800,000
4. $600,000 to $1,200,000
So the stock investor made $1,200,000 less his $100,000 investment for a $1,100,000 profit
while the buyer whose loan is now paid off made $16,000,000 less his $100,000 investment fora $15,900,000 profit.
SUMMARY: House: $15,900,000 profit
Stock: $ 1,100,000 profit
Gee, I guess this proves that there was indeed leverage taking place, and gee, I guess leverage really does work wonders.
CONCLUSION: Buying beats the pants off renting and investing in the stock market. (and there is leverage)
And the story is not over, folks:
Lets look at the time of death at age 80. The renter at age 65, when he retires, finds himself looking at $12,000 per month rent, while the buyer now has his house paid off so no rent payments. But at 80 the renter's rent is now $24,000,000 per month. So EVERY PENNY the renter made in the stock market has to be spent in rent. So the renter dies broke.
Now lets look at the buyer. the buyer enjoyed his retirement with a free and clear house with no monthly mortgage payments. His $16,000,000 house has appreciated to $32,000,000 at the time of his death. So the buyer leaves his children with a wonderful $32,000,000 estate while the renter leaves his children NOTHING and probably was a burden on them in his old age.
Now, dear readers, you decide for yourself which is better. And you decide whether or not there is leverage in the real estate investment, or if it can be simply "dismissed" as that stock broker wants you to believe.
12:37 a,m.
you say this was your second post ever.
YEAH RIGHT! Tell me another one.
It is obvious from how you talk and your choice of words that you are that stock broker who keeps telling folks that renting is better than buying and the baloney about there being no leverage. this is your second message TODAY but your 20th on this blog string.
I was born at night but not last night.
Your "funny math" is still way off and faulty.
it is a fact that rents here go up 5% compound each year not 4% as you claim.
and you still ignore the reality of leverage. it is the entire house that appreciated my friend not just the down payment. and the monthly mortgage payments are exactly equal to rent over the 30 year life of the loan so they are attributed to the cost of shelter and NOT as part of the investment cost.
Don't you ever get tired of being corrected. Well get uses to it because you have met your match.
12;37 a.m. Your math is wrong!
In your table you show the buyers $50,000 only going up to $57,300.
this is wrong and it invalidates your whole table and your whole theory!
Here is the reality. The buyer buys a $500,000 house for 10% down which is $50,000.
Santa Barbara real estate appreciates an average of 10% per year. So at the end of the first year the $500,000 house went up 10% which is $50,000. So the equity is the $550,000 less the $450,000 loan which comes to $100,000. Subtract the $50,000 down payment from the $100,000 and you get a $50,000 , 100% profit the first year.
NOW just why do you show on your faulty chart that the home-buyers $50,000 is now only worth $57,300 when in reality its now worth $100,000. as compared to the renters $55,000.
You just keep coming back time after time with the same old faulty math. it has ben made so very clear to you that its apparent that you know better but are trying to pull the wool over our eyes.
It ain't going to work, my friend. because you can't alter the reality that buying is significantly better than renting cue to the power of leverage. (Which you would just love to ignore.)
CAN ANYONE PLAY THIS GAME?
Allow new to share my system for buying houses that sure beats the stock market.
STEP 1: Buy one $1,000,000 house with $100,000 cash down. Houses in Saint Barb appreciate at 10% per year average so double in price every 7 years. Hold for 7 years.
STEP 2 (end of 7 years) Refinance house which has now doubled to $2,000,000 each, and pull out cash buy one more house to rent out so the tenant makes the payments for your investment. ( thanks tenants) hold both 7 years
STEP 3 ( end of 14 total years) Both houses have doubled again to $4,000,000, so refinance both and pull out cash and buy 2 more rental houses. ( thanks again tenants). Hold 7 years.
STEP 4 ( end of 21 years) All 4 houses have doubled yet again to $8,000,000 EACH!. Refinance all 4 and pull out cash to buy 4 more rental houses. ( bless those tenants). Hold 7 years.
STEP 5. ( end of 28 years) All 8 have doubled again to $16,000,000 EACH ( throw a party at the
for the blessed tenants) refinance, pull out cash to buy 8 more houses. Now own 16 houses.
Lets take a peek at the buyers financial situation: he now owns 16 houses. his own plus 15 rental =houses. At 55 per year the rents have doubled twice from $3000 to $6000 at year 14 and again to $12,000 a month at year 28,
He now has $180,000 a month rental income which is $2,160,000 per year income.
AND he owns 16 houses worth $16,000,000 for a combined value of (are you all sitting down)$256,000,000. all done on the initial $100,000 investment in A HOUSE
Now compare that to investing that same $100,000 in the stock market and having it appreciate to $1,600,000 less the initial $100,000 yields a $1,500,000 profit. compared to owning $256,000,000 in houses that are going to make you another $256,000,000 in 7 short years later when they double again.
and lets not forget the rental income from that $2,160,000 a year gross rental income.
I can live on that.
So don't anyone ever try and tell us that fairy tale that renting, and investing in the stock market, is better than buying houses in Santa barbara because it just ain't true!
BLESS THEM TENANTS! they're sure making someone rich but it sure ain;t them.
8;59
Just what state do you live in?? it sure ain't California. in california the state law says that property taxes can only be increased n\y 1% per year.
You are wrong once again.
And as for real estate commissions they ARE 7$ in some states but not in California. In California they are 5%. With NUMEROUS highly qualified and full service brokers charging only 3% for full service. There is a good one in Santa Barbara who only charges 1 1/2 % to sell a house. also one does not have to hire a broker but can easily sell a house himself with NO COMMISSION.
So , my out of State friend, you are wrong yet again.
Getting tired of being wrong yet?
lastly you say the buyer pays a commission twice, once when buying and once when selling.
You are wrong yet again. the commission is paid by the seller not the buyer. So the buyer of real estate only has to pay a commission one time.
Now if you are going to make the argument that it is really the buyer who pays the commission then you are still wrong because if the buyer always pays the commission then when you sell your house the buyer of your house will pay that commission.
Well that makes three strikes and your out.
lastly , since I have proven that you live out of state because you didn't know our tax rules or our commission rates, this also means that you don't understand Santa barbara real estate.
It is a fact that Santa barbara real estate is like no other. It appreciates twice as fast and when there are nation wide corrections our prices only drop half as much as everywhere else in the country.
Santa Barbara is an exclusive small beach town which has the very best quality of life in the country. It is also the most beautiful town in the country. Santa Barbara is squeezed between the mountains and the ocean and the land is already fully built our so no more houses can be built here. Also Santa barbara is a no growth community which also means almost no more houses will be built here. So the supply is fixed. Now lets talk about the demand side: There are 38,500,000 people in California. 20,000,000 of these now live within 100 miles of Santa Barbara. the state is growing by over 600,000 per year and it is projected by BOTH the U.S. census and the State Department of housing to double in 40 years. then there will be 40,000,000 people within 100 miles of Santa Barbara living in l.A., the armpit of the world. Now just how many of those would like to move to Santa Barbara, the most desirable town in the country. I'll tell you how many : ALL OF THEM.
All markets are determined by the law of supply and demand. Supply and demand are such that Santa Barbara house prices are going to SKYROCKET the next 40 years BEYOND ANYONES WILDEST IMAGINATION.
The bottom of this current correction , which is going to be next Christmas, followed by 1 or 2 flat years is the golden opportunity of a lifetime. Also the very last chance for the middle class to EVER buy here. It is a FACT that house prices will NEVER AGAIN ever be as low as they will be 1 year from now.
So those smart enough to see the handwriting on the wall are going to be rewarded beyond their wildest dreams. Those that don't , like our stock broker friend , are going to be left behind in the dust.
And yes, our out of state friend is a stock broker.
Buying is better than renting. We were renters. All our friends were buying so we followed suit. .
My wife and I bought a house in Bel Air subdivision with a nice view about 5 years ago for $550,000 with 10% down. We painted it inside and out. We almost sold it last year for $1,400.000. We messed up big time and didn't take the offer. We are going to sell it now for somewhere around $1,200,000 and take advantage of the temporary lower prices to buy a 40 acre ranch in Santa Ynez with a nice house and barn on it.
This would not be possible except for our buying a house.
I can't imagine anybody saying renting is better than buying. That just doesn't make any sense, when all of our friends made a killing by buying a house here.
Real Estate Guru is pretty much right in what he says. All I know is that what he says fits in with my own personal experience.
Here is what happened to me:
As a single man I bought a house here for $250,000 in 1983. I was making $50,000 a year then and I paid $50,000 down.
Now, 20 years later, I am still am still making $50,000 per year, because I only work 20 hours per week. But my house is now appreciating at an AVERAGE rate of $200,000 each year.
In other words owning a home in Santa barbara is making me rich. Very rich! It's all due to the leverage provided on the cash invested the first few years.
It is true that the leverage on the capital does decrease as time goes by but that does not matter. All that matters is that the initial high leverage causes a modest investment to, over 20 years, build up into an investment that then generates $200,000 of money each year compared to ones $50,000 salary.
In other words, the simple act of buying a house in Santa Barbara made me rich. Yes, it was a little struggle the first 5 years, but all it took was a little budgeting and forgoing living a luxury lifestyle for 5 years. It was not that big a deal. It forced me to save when I otherwise wouldn't have.
Now, thanks to the best decision I ever made in my life, I am now set for life and I can live like a king.
My only regret is that I didn't buy five of them and let the renters pay the payments to pay off the house for me, while I got all the appreciation.
Bulldog 3:19pm. Here is the calculation that led to the $7300 increment in the first year.
The purchaser paid $260,000, the median price in 1987. After 13 months, the price had increased to $281,320, an increase of 8.9%. The $23,174 increase *includes leverage*, because it is the increase is on the total value of the home. However, in the first 13 months the homeowner paid $18192 in mortgage payments, received $2652 in mortgage interest tax deduction, paid $2817 in property taxes, and paid $5144 in insurance and upkeep. They also paid off $7583 of their loan.
So, their net after 13 months is:
+23174+7583-18192+2652-2817-5144=$7256, rounds to $7300.
8:59am... yes, property tax does increase at 2% a year (sorry 9:20pm, it is the tax that is 1% of the assessed value, but the assessed value may rise at 2% a year in a rising market).
But 8:59am, I think you pulled a stunt by getting me to take 11.8% as the stock market annual increase. The long term average is only 10%. So I'll use that.
But according to the Federal OFHEO constant housing value figures, the Santa Barbara annualized increase is 7.4%, not 8.2%, which I assumed before.
And I think it is fair to charge the seller a 5% real estate commission. Yes, it can be avoided, but it is still the most likely situation.
OK, I'll take 5% as the inflation in rent. So the renter who paid $1000/month in 1987 pays $2643/month in 2007 and will pay $4305/month in 2017. The homeowner who paid $1800/month in 1987 pays $2542/month in 2007 and will pay $3257/month in 2017. The homeowner's mortgage payment does not increase but their property tax increases at 2% a year and their maintenance and insurance etc does also increase at 5% a year. 10:56am you look pretty much correct on the increase in rent.
OK, so again, I'm comparing:
1)A renter who starts renting in 1987 and pays $1000/month then, and invests $50K in the stock market Vanguard S&P 500 fund in 1987 and then puts $800/month in that fund for the next 30 years. Total expenditure $1800/month initially. I assume the Vanguard fund appreciates at 10% a year, which is the 200-year average of the US stock market.
2)A homeowner who buys the median home in 1987 at $260,000 with $50K down, mortgage payment/month $1400/month (7% interest fixed loan), $200/month mortgate interest tax deduction credit, $217/month property tax (1% per year of $260,000, but assessment increases at 2% per year), and an inital $388/month of insurance/maintenance that inflates at 5% a year. The homeowner also pays $1800/month, just like the renter, initially. I assume the home value increases at 7.2% per year, which is from the OFHEO data for Santa Barbara, using resales of the same homes to avoid value creep.
3)For taxes... the renter/investor must pay 15% capital gains, the homeowner only capital gains on home profit over $500,000.
4)The homeowner must pay a 5% commission when he sells.
I get that the renter ends up in 2017, when the homeowner's 30 year loan is finished, with $1.45 million, while the homeowner ends up with only $1.03 million. Renting, saving, and investing wins on the 30 year time scale.
What about the subsequent 20 years, when the homeowner has paid off his home and the renter must continue to pay escalating rents? Good question. I'll assume, out of fairness, the renter stops investing the $800/month. The homeowner must continue to pay maintanence and insurance.
In dollar terms, in 2017 the renter pays $4320/month (still escalating at 5%/year) and the homeowner now looks like they have great deal with a monthly payment of only $2070/month for maintenance and property tax.
However, the renter is making in 2017 $20,000/month off his capital invested in the stock market, while the homeowner is only making $12,000/month off the escalation of his house value. That more than compensates for the homeowner's lower monthly expenses.
So after 20 years, the renter/investor ends up netting $4.7 million, compared to only $2.8 million for the homeowner.
Looks like renting and investing does win, even in Santa Barbara. Outside of Santa Barbara where real estate does not escalate at 7.2% a year, renting and investing is even better than home ownership.
This is my third post here! I don't know this anonymous poster who first advocated renting and investing and who loses his temper too much but at least they got me thinking about renting and investing.
Darn we lost the first 99 just we we were coming to a consensus.
Wow, the real estate guys lose their cool about this one.
But they never provide APN's for their stories, and they never carefully lay out all the numbers.
They just randomly shout `leverage' and `Santa Barbara's Great!'.
I think renting and investing is even better than the numbers guy says. Way better.
Buy low coast index funds... like Vanguard's VFINX. It is stock brokers who hate VFINX. Stock brokers want to churn your money to take commissions. That is why you should use low cost index funds. And use good discipline to purchase a good amount every month no matter what. Make saving and investing as important as your rent.
But if you do you do better than buying a house! And you avoid the real estate guys who have preyed upon sub-prime borrower and maybe brought about a worldwide recession with their schemes.
Theres no doubt in my mind that there is at least one underemployed stock broker and one underemployed real estate agent on this thread.
You two obviously have too much time on your hands. I wonder if it's because of the lousy stock and real estate markets...
12:23 NUMBERS GUY
sorry, my friend but you are wrong yet once again.
1. proposition 13 says that the assessed value shall be increased 1% per year , and no more, even in a rising market.
his proves that you live out of state and not in California or you would know that!
2. how many times do I have to explain to you that the mortgage payment is NOT a part of the investment but is a part of what it would cost them to rent an equivalent house. living in the house has a value and the monthly payments are that value received SO THEY ARE NOT PART OF THE INVESTMENT. What do you expect to get to live for free?
3. Next, the insurance and repairs are NOT $5144. the insurance on a $260,000 house cost $500 per year in 1987. and the average repairs on a $260,000 house in 1987 were only $1000 per year. Also the improvements, such as installing a new roof, actually increase the value of the house, so one gets some of that back.
another reason for not counting the monthly payments as part of the investment is that a renter has his rent increase by 5% each year which doubles every 14.4 years. So over the life of the loan the monthly payments are exactly the same as the rent because payments are double the first year but half the last year and equal in the middle ( average) year.
so your math is simply wrong.
here is the correct math;
Homeowner puts 105 down or $26,000.
The $21,320 increase ( your number) is his profit on his $26,000 investment the first year.
While the renter invests the same $26,000 in the stock market and makes 10% per year for $2,600 profit.
Buyer: $21,320 profit
Renter:$ 2,600 profit
Yes. it's the 10 to 1 leverage that provides the homeowner with 10 times the profit as the renter/stock investor.
and this advantage continues the entire 30 years, at which time the buyer now owns a $4,000,000 home free and clear ( a $3,974,000 profit) while the renter has only $400,000 profit.
CONSIDER THIS; 30 years later the stock investor now has built up enough to put his $400,000 profit as a 10% down payment on that same home and owes a $3,600,000 loan on it (with $20,000 per month mortgage payments); while the buyer owns it free and clear with no payments.
Now remember the 30 years the buyer and the renter both paid the exact same GRAND TOTAL amount for rent or payments, so that is not a factor.
so at the end of 30 years he renter /investor ends up in the exact same place that the buyer was in at the time he started. so in reality THE RENTER /INVESTOR GOT NOWHERE. While the buyer got rich.
The vast majority of Americans know all this and this is why 99% of those that can afford to buy buy do buy while only 1% of those that can afford to buy rent. So your faulty advice goes against the common collective wisdom and enlightenment of 99% of americans with adequate money to make that choice. It is this group of americans who understand basic math and economics and business because they represent the educated who got ahead. Are you trying to ,have us believe that you know better than 99% of the educated americans.?
obviously you don't because your argument is full of holes and full of math errors. The greatest error you make is your not recognizing leverage for what it really is: a way to control 10 times of a capital asset than the amount of cash invested. so when that asset goes up 10% in one year your cash invested goes up 100% in one year.
I still say you are one in the same person who wrote all those other 20 times because your syntax, use of words, sentence structure, language, and the way you write( talk) is exactly the same and your argument and advice is exactly the same.
Also you obviously live out of state because you didn't know that our commissions are 55 not 75 as in your state and you didn't know that prop 13 sets our property assessment to increase at exactly 1% , and no more, each year as compared to 2% in your state. It is likely that you work for that stock fund and they pay you to seek out blogs about housing on a national basis and spread the word that renting and investing is better than buying so that more people invest in their fund.
You are exposed my friend!
You also claim that you and your friends all save 405 a year. this is baloney!. the average savings rate of all americans is only 1% a year. only 1 in 1,000,000 saves 40%. Any financial plan has to fit with the economic reality. So ,your 'plan" has to fit with the fact of 1% savings per year. Or else it's a plan that only works for that 1 in 1,000,000 and NOT for the common man on the street.
so this fact is also proof that your plan while fine in theory , is simply that : a theory. and has no basis in reality and simply wont work.
Here, my out of state stock broker friend is the reality that has been PROVEN to work because it has worked for millions of people ( as compared to your theory):
THE VERY BEST INVESTMENT THAT ANYONE CAN MAKE IN THEIR LIFE IS TO BUY A HOUSE! Period! The end!
In the stock market a fool and his money are soon parted by the stock brokers whose well known motto is "Churn em and burn em."
I checked my numbers this morning. Late night blogging can sometimes lead to errors.
I found a mistake... when I projected out beyond 30 years, during the period when the renter pays escalating rents and the homeowner no longer pays their mortgage, but still must pay property tax and maintenance and insurance, I made a mistake. I only extrapolated out 10 years, not 20 years.
After 20 years, in 2037 (50 years after the scenario started in 1987), the situation is that the renter is paying $12,400 a month since their rent has escalated 5% a year. The homeowner is paying only $5,400 a month. Seems like a great deal for the homeowner.
But, the renter/investor has $19.9 million in their S&P 500 index fund, which appreciates at 10% a year or $157,400 a month. The homeowner has a $9.4 million dollar home that appreciates at 7.2% a year or $54,500 a month.
The renter/investor earns $102,900 a month more than the homeowner. This more than covers the $7,000 a month more the renter pays in rent above the homeowner's property tax and maintenance.
If both sell out in 2037, the renter/investor retains $14.5 million after capital gains taxes, the homeowner $6.1 million after real estate commission and capital gains.
Renting and investing gives a person $8.4 million more after 50 years than purchasing a house does. That is in 2037, of course. Putting that in 2007 dollars, the renter/investor ends up $3 million ahead of the homeowner.
As usual, mileage may vary. I like owning my home.
The real message here, is, whatever you do with your abode, rent or buy, you should really be constantly investing in low-cost index funds like Vanguard's S&P 500 index fund. Fidelity has equivalent products. Stockbrokers are reluctant to tell you about them, and some will work hard to dissuade you. Stockbrokers want commissions! The Vanguard products and the Fidelity Spartan products minimize commissions and market churn.
All the smart brokers eventually regress to the mean of 10% a year for the US stock market. And they'll charge you a percent or 2 for their conversational skills.
Having said that, the big surprise to me is that renting and investing is very, very competitive with, maybe even financially smarter than home ownership.
Who'd of thunk it.
My fourth post. Hopefully my last.
7;33 a.m.
You are that same out of state stock broker who has written in 20 times and says the very same thing and each time that real estate broker replies, and points out all your faulty math ( and you make considerable errors and a faulty premiss and theory) and your faulty thinking and analysis.
You are busted! We all see right through you, and we are not buying your message.
Please go find some other blog about housing, where the readers are gullible, and leave us alone. We here are all educated as to what Santa Barbara real estate can do: make their buyers rich. And it has for 100,000 of us, as compared to losing money in the stock market.
If the stock market were a sure 10% the banks would by putting their money there instead of loaning it our at 6% .
sa1 - you're right I've spent too much time here, but I'm not a stock broker.
Stock brokers hate the low-cost mutual funds I advocate, because those funds minimize commissions and the churning that enriches stock brokers.
But I consider the time here well spent. There is so much pornographic financial advice out there, from both stock folks and real estate folks. Simple numbers like those from `numbers guy' are really hard to find.
Another contrarian view that renting can be better than buying, and although the author is a stockbroker, he does not even advocate investing the difference between rent and home purchase/tax/maintenance/insurance costs, yet he still concludes that the case for renting is very strong.
Here is an article by David Crook, an editor at the Wall Street Journal, from Mar. 12, 2007 where he questions the wisdom of depending on your house as an investment. He does not consider the alternative of renting and investing the difference between rent and home costs in a prudent investment like an index fund, however. Here is one of two tables that went with the article, documenting the full costs of purchasing a home today. Not for Santa Barbara... in Santa Barbara, triple all the costs, so you end up paying a total of $3 million for a $1 million house.
----------------------------------
PLANNING YOUR retirement? Don't bet the house on it.
Your home means a lot of things to you, most of them good. Your home gives comfort and protection to you and your family, and it could well embody all your material hopes and dreams.
But houses have become much more than just places to live. Your home is probably your biggest asset, and the price you could ask for it today is almost certainly much higher than what you paid for it back whenever.
As a result, houses have become substitute credit cards, as profligate owners borrow their equity to finance everything from cars to vacations. Among thriftier owners, the equity they have built up in the family home has become a vital part of retirement planning -- a "fourth leg" of the now-unstable "company pension/personal savings/Social Security" stool that was long the model for a financially secure old age.
Unfortunately for both groups, however, houses are not very good investments. For the grasshoppers, there's nothing quite as stupid as paying off your 2002 trip to Orlando in 2032, when you finally settle up your refinanced "cash out" 30-year mortgage. And for the ants, economic studies have demonstrated over and over that houses (1) cost more than most people make when they sell and (2) rarely match the long-term returns of stocks or other investments.
And that's doubly true today, with much of the U.S. well into a real-estate recession. It's unlikely that homeowners in once-booming areas will see a return of skyrocketing prices anytime soon.
"Real-estate investments suffer serious and sometimes prolonged downturns," writes economist W. Van Harlow in a new study of home equity and retirement from the Fidelity Research Institute in Boston. "A real-estate 'bust' could be quite damaging to an investor nearing retirement who relied too heavily on home equity."
It may be late for a lot of homeowners to read this, but here it goes anyway: It's risky and bad planning to have too much of your net worth in your principal residence. No prudent stock-market player would put 60% or 70% of a portfolio in just one stock, but millions will hold that much or more of their total net worth in just one house.
Food for thought:
-- If you bought a house in Los Angeles in 1990, just as the real- estate market turned downward, you would have had to wait a decade for your home's value to return to what you paid.
-- If you bought in Rochester, N.Y., in 1980, you would have seen only a mediocre 4% annual growth for the next 25 years.
-- If you bought in Dallas in 1986, as the oil boom went bust, your home wouldn't have appreciated at all before 1998.
So with all that in mind, here's a question-and-answer rundown of some financial issues of home owning.
Q: My home is my largest asset. Why shouldn't I rely on it to provide my nest egg?
A: Because a house can be an inefficient means of investing, and it costs far more to buy and operate than you think. Homeowners can easily end up paying more to live in their houses than the supposed "profit" they make when they sell them.
When most homeowners figure their returns, they don't do much more than subtract the price they paid from the price they received. Then they come up with a really big return because they paid only a 10% or 20% down payment. So they figure they made a huge "profit."
But they didn't. That's because the costs of owning a home -- buying it with a long-term mortgage and then paying taxes on it, insuring it, repairing it, renovating it -- sap most of what most homeowners think they make in price appreciation.
Houses are nice financially because there are not many other things you buy that actually go up in value, and not many things can put a six-figure check in your pocket when you sell them. But don't delude yourself: You've already spent most of that check, and you are likely to spend the rest in just a few days when you buy a new home.
Think of your sale proceeds another way: not as a true profit, but as a huge rebate. Some of the thousands of dollars that you paid into the house over the years are being returned to you -- sometimes with a bonus, often without.
Q: But it's certainly better to buy a house than to pay rent.
A: That depends on when you buy, and how long you own. Buy at the wrong time -- like during the kind of buying frenzy that much of the country has just experienced -- and you could well end up wishing you had rented instead.
Boom market or bust, home buying has so many extra costs -- from upfront "points" paid to a lender to title insurance and appraisal fees -- that over the first five to seven years, a renter who invests the equivalent of a down payment in stocks could easily do better overall than a house buyer. Compounding that problem: Most homeowners move within seven years.
As the ownership timeline stretches out to 15, 20 or 30 years, however, the buyer will almost certainly do better than the renter, especially given the tax benefits of paying mortgage interest over traditional rent and the big rebate when the owner finally sells.
But the typical buy vs. rent argument clouds the more important point: A house is an inefficient way of building wealth.
Q: But I have to live somewhere! And I have to pay something for a place to live. Certainly it's better to pay "deductible" mortgage interest than rent.
A: Buying a house with a long-term mortgage is just another form of renting.
Mortgage interest is rent that you pay to your lender for the use of its money rather than to a landlord for the use of his house. Yes, the government picks up a portion of that with the tax deduction, but most of your monthly payment neither builds equity nor is deductible. It just goes down the same black hole that sucks up any other renter's money. And it takes 20 years before a typical borrower pays more principal each month than interest.
"I have to pay something" is a rationale that home buyers use for going deeply in debt and paying tens or hundreds of thousands of dollars in interest to buy a house that, they mistakenly believe, will make a big profit for them down the line.
Q: So how much does a house really cost?
A: You can easily end up spending three times the purchase price of a house. Today's buyer of a typical $300,000 single-family home who takes out a 30-year loan will end up paying the price of the house again just in interest. Add 30 years of property taxes, homeowner's insurance, regular maintenance and a couple of big-ticket repairs or improvements, and the total cost of buying the home could easily top out at well over $1 million.
Q: Yes, but the house will be worth much, much more.
A: Maybe, maybe not. Whether you come out ahead depends on where and when you buy. Even cash buyers might be surprised to see that they can't be assured of making a profit.
"The Costs of Home Ownership" table is a simplified rundown on a typical single-family home -- a house that was bought for $50,000 in 1977 -- based on national appreciation rates as reported by the Office of Federal Housing Enterprise Oversight (OFHEO). Included are modest estimates of other home-owning costs (not adjusted for inflation). To keep things simple, there are no transaction costs, no additional borrowing to finance improvements and no refinancing costs, all of which would drive the expenses even higher. It's not a pretty picture.
Q: Those numbers don't seem realistic for where I live. You can't buy a house here for that kind of money.
A: To be sure, not everyone did so badly as the national average. OFHEO's Home Price Index calculator puts the average 30-year appreciation for a house in the ever-pricey San Francisco metropolitan area at 1,125%, compared with the national average of just 481% . So if you bought that $50,000 house in San Francisco in 1977, it would be worth about $613,000 today and, assuming much the same costs of ownership, you'd make a true profit of $219,000.
You would have done well in other coastal metro regions, too. The comparable house would be worth about $593,000 in Los Angeles (up 1,085%), $549,000 in New York (998%) and $432,000 in Washington (763%).
But some other big cities didn't fare as well. You'd be in the red in Chicago, where home values rose 463% and the house would be worth $282,000. Your house would be valued at only about $176,000 (252%) in Dallas and just $147,000 in Houston (193%).
Q: But even if I had bought in Texas, I'd still essentially break even. Buying let me live "rent free" for 30 years.
A: Living "rent free" is moving in with your parents or your wealthy lover in Tuscany. You didn't live rent free. You had some of your rent money subsidized and then some more rebated.
Yes, you are sitting on a lot of home value, but you've spent a lot -- probably more than the house is worth -- getting what you have. And you almost certainly lost some investing opportunities along the way while you were spending your money buying the house.
And that's assuming everything breaks your way. If you don't sell at the top of the market, you could see stagnant or falling values for a while. There have been real-estate bubbles before. In San Francisco, where it looks like prices may have hit their high mark in the third quarter of 2006, home values peaked in early 1990 before falling for the next eight years. Houston saw a modest surge in the '80s, followed by an equally modest decline and then two decades of grindingly slow appreciation.
Q: That's still money that I wouldn't see otherwise. Even getting just some of my money back is better than getting none.
A: But there's another kicker. You haven't gotten any money back yet. All you have is a house that's 30 years older than when you moved in. In order to realize your windfall, you'll have to borrow against it or sell it.
If you borrow against a house you've paid off, then you will start mortgage payments all over again.
If you sell it, what are you going to do with that big check in your pocket after you've walked around for a couple of hours feeling richer than you've ever been? You'll probably spend most of it in just a day or so buying another house.
Q: So I'll downsize, find a smaller, cheaper house, buy it and then invest the rest of the money.
A: Prices tend to rise or fall across an entire market. So if you want to stay in the same metropolitan region and save a big chunk of your rebated nest egg, you should be prepared to go significantly downscale -- move to a much less desirable neighborhood.
Consider a hypothetical Washington-area couple who bought their home for $55,000 in 1977. (You can see a complete rundown on the house at WSJ.com/Reports.) With improvements and market appreciation they appear to have done quite well. If they sell their house today, they could expect to get something in the neighborhood of $860,000. And they would walk out of the closing meeting with a rebate check of about $550,000, of which about $175,000 would be profit.
But they're facing a tough market where the median price of a condo is two-thirds the cost of a single-family home. They don't have enough money to make the most obvious move down -- from their house to a comparable apartment that would cost around $575,000.
Q: Then I'll move to someplace cheaper, like Houston.
A: You still face borrowing or spending all or most of your cash on your new house -- and you will still have maintenance, property taxes, insurance and other "I have to pay something" costs.
If our Washington couple chooses to leave and move to a cheaper housing market, they will still have costs greater than they think. Popular retirement communities are usually cheaper than big metropolitan areas, but they are not so cheap that sale proceeds will plant them on a country-club fairway and pay for the lifestyle that goes with it.
According to Coldwell Banker's often-cited home-comparison calculator, a house comparable to the place in Washington would cost $439,000 in Fort Myers, Fla., or $407,000 in Orlando. The couple would do a little better moving to Tucson, Ariz., where the comparable house costs $281,000 -- leaving the sellers with less than half of their rebate windfall.
So yes, cashing out in Washington -- or San Francisco or New York -- will give you enough money to buy a nice place on a golf course somewhere in the Sun Belt. And you might have $200,000 or $300,000 left over.
Q: So what can I do if I've planned too much of my retirement around my investment in my home?
A: If you already own your home, you can still rein in your expenses, and diversify your investments. Unfortunately, there's not a lot you can do about reducing many of the costs of home owning, such as property taxes or replacing a roof.
But you do have control over two of the biggest home-owning costs: interest and renovations. Both are big money losers. Even with the tax deduction, most of your mortgage interest is still just wasted rent money. So accelerating your principal payment will result in huge savings down the line. Add $300 a month to the payment on a 6.25%, $300,000 loan, and you'll save 10 years of payments and $83,000 of after-tax money -- enough to put a kid through a public university.
Few, if any, renovations make a profit. A new kitchen or family room might raise the resale value of a house, but rarely as much as they cost to build. And if the homeowner borrows the money, the renovation work could end up costing two or three times what the contractor charged.
If you don't already own your own home, do the math. Don't buy if you think you'll be moving in just a few years. Don't buy a house that's too big for your needs or so expensive that you will strain to pay for it simply because "it's a good investment." It's not.
---
Mr. Crook is editor of The Wall Street Journal Sunday and author of "The Wall Street Journal Complete Real-Estate Investing Guidebook." He can be reached at david.crook@wsj.com
SA1
Only Sara knows for sure, but you're right it would be interesting to know if there are many people posting on this "how to get rich" subject. It seems to be very addictive and passionate for some. Really meaningful stuff.
Nobody every talks about what money is for--excepting that's it's important to get more of it.
Looks to me that on any issue we can conclude that what turns the political wheels is what any given issue does to property values and that conclusion amps up the citizenry.
Hello everyone,
I watched with amusement the battle between the stock broker and the real estate broker.
why?
Because I know which of them is right.
Now I don't either buy a house to live in, or rent and buy stocks.
I do something different. I rent a luxury house to live in ( a real bargain for what you get) and then I buy a low end house with 20% down payment to rent out so that the tenant's rent makes the payments.
This proves that there is indeed leverage because the monthly payment is not part of the capital that I have to invest.
So when my house doubles in value, whenever that is, my cash down payment has just gone up 500%.
Since houses double in almost exactly the same number of years as the stock market doubles
the same down payment money invested in the stock market doubles . But the money made in the house investment is exactly 5 times as much as the money made in the stock market.
So this proves that the real estate broker was right, and the reason he was right is because there is indeed leverage taking place.
Now as an investment property one cannot only deduct interest and taxes but one can also write off depreciation on the building . Which gives a substantial tax shelter. Thats why all my fellow Doctors invest in real estate and not the stock market. For the wonderful tax shelter that it provides.
Now the government has not only given me the tax subsidy but also shelters our profits because when sell I can use a 1031 tax deferred exchange and pay no taxes. Our government has set it up so investors in real estate are really taken care of.
the best thing of all is that my tenants actually make the monthly payments so pay for my investment for me. At the end of 30 years I own a house free and clear, while my tenants end up with nothing.
I have been doing this for 20 some years now and have accumulated much more than if I had invested in the market. So the leverage is very real.
The reason I rent is that I live in a luxury home and luxury homes can be rented much less that to make the payments. But I buy low end because low end homes rent for significantly closer to the amount of the loan payments. And so none of my investment houses are nice enough to meet my needs.
Now , just to settle the argument between the stock broker and the real estate broker I offer this:
If I had been living in one of the the houses that I purchased instead of renting then in effect I am renting my own house from myself. So just as my tenants rent makes the loan payments instead of it being an investment expense, now my own renting my own house from myself is making the house payments and therefore it is not an investment expense. so the real estate broker is right when he says that the monthly loan payments are not a part of the investment capital but are allocated as shelter living expenses.
Anyway they are both wrong.
The very best way of all is to rent a nice home at the bargain rent price and invest in buying rental houses using leverage to multiply the profit by 5.
And to take advantage of all those wonderful tax subsidies that the government gives to us real estate investors. And to take advantage of a system of investing that allows my tenants to actually pay the last 80% of my houses for me.
After 20 years of doing this, I now make a lot more off my rentals than I do as a Doctor. I just wish I had know about this wonderful system 10 years sooner, as its in effect like owning a gold mine. The tenants are providing the gold.
Looks like we will hit 99 again soon...just a note that the last few comments did not have the benefit of seeing the prior due to moderation happening at the end of the day.
12;40 ( otherwise known to us as the stock broker).
Since you read the wall street journal that indicates you are a stock broker. Almost nobody read the articles in the wall street journal daily except for stock brokers.
You made a big point about how one pays $3,000,000 for a $1,000,000 house.
BIG DEAL! IN 30 YEARS THAT HOUSE IS WORTH $16,000,000. ( still beats the pants off the stock market )
while the person who followed your advice and rented and invested now has built up $3,200,000 . BIFG DEAL. All that is enough for is making a down payment on that $16,000,000 house.
so the one who bought a house now owns one free and clear with no payments but the one who rented and invested for 30 years now buys his and still owes a $12,800,000 loan with monthly payments of $80,000 a month.
Lastly that fellow who wrote that article you posted in its entirety, also, like you, does not understand that the monthly payments are NOT 100% attributable to the investment aspect of the house but are in fact the cost of his shelter expense just as if he didn't own a house he would have to spend that money as rent. Bottom line is that writer slanted his story to prove his pre-conceived point. he . after all, is a stock broker just like you are and is trying to steer people away from buying houses and into the stock market. I don't care whom he is ---he is wrong and his article is based on faulty math and faulty reasoning.
8:51 a.m.
We wish this was your last comment too.
( unfortunately you sent another two lame comments after that, Mr. Stock broker.)
We all can see that every single comment that advocated for renting was from the very same one person. You sent 25 of these 91 comments.
please GIVE IS A BREAK AND SHUT UP ALLREADY!
12;40 p.m.
David Crook said in his article that you posted that, and i quote; " Buying a house is not a good investment'
That guy is full of it! What he says does nor fit with reality. it's all theory. Millions and millions of people have made a killing by buying a house. Many many more than ever made an equal amount of money in the stock market.
It is the stock market and index funds that are not a good investment and contrary to what this lame brain says it is well known and accepted fact that buying ones own house is the single best investment that anyone can ever male in their life.
"If the stock market were a sure 10% the banks would by putting their money there instead of loaning it our at 6% ."
Bwahahaha...
I was going to make the same point except that if real eastate was a sure thing, why wouldn't the banks just buy the houses and rent them.
Oh, and Doc? You must be a proctologist. I can imagine my appointment with you going something like this:
sa1: Doc! It hurts when I do this.
Doc: Well then don't do that...
sa1: OK thanks, I feel better now, here's your $120.
"I rent a luxury house to live in ( a real bargain for what you get)"
That luxury house wouldn't happened to be owned by a doctor who's trying to get rich off of you, is it?
You do realize you have to pay income tax on your rental receipts right?
You do realize that a 1031 exchange is for like investment property only and the tax bill will be paid before you get to spend your hard earned profits.
You do realize that your depreciation is subtracted from your cost basis which increases your tax bill when you finally sell (if you live that long).
There's a reason why Docs and celebs are the favorite target of financial con men.
By the way, what's your number? I got a friend at the IRS who may want to have a little talk with you...you know, to get some advice on how to get rich.
sa1......a proctologist conversation? You push the envelope brother. Or, maybe you thought you would be 99.
8:51 AM -- I'm not so sure that the commenter is the only one commenting. This must be something in the back of everyone's minds right now. Sell now or wait a few years, you decide.
8:48am.
1)Here is text taken from Santa Barbara County Tax Assessors Office:
-------------------------------------------
Proposition 13 restricts both the tax rate and the rate of increase in valuation of real property as follows:
*The maximum amount of property tax cannot exceed 1% of a property's taxable value, plus bonds approved by the voters, service fees, improvement bonds and special assessments.
*A property's original base value is its 1975-76 market value. This value is automatically increased by a maximum of 2% annually (or less if the California cost of living rate is less than 2%). A new base value is set whenever there is a change in ownership or new construction. This base value is also increased by a maximum of 2% each year.
--------------------------------------------------
The yearly base value may be increased by 2% a year.
2)I compare all housing costs for the homeowner and the renter. It is not correct to omit mortgage payments for the homeowner and include rent for the renter. In both cases all costs for housing must be included for a fair comparison.
3)According to this table from the Wall Street Journal, interest and maintenance amount to 2.3% of the value of a home. If we use the WSJ numbers, the yearly insurance and maintenance would be $6,010 per year on a $260,000 home. If anything, $5,144 per year is low by almost one thousand dollars a year.
My calculation indicates that after 30 years (including 5% inflation in rent, insurance, and maintenance) the renter pays a total of $815,400 in rent for the example I laid out. The homeowner pays $853,117 in mortgage payments. Those numbers are very similar, as you point out.
However, the diligent $800/month investing of the renter has resulted in $2,552,800 in their S&P 500 Index Fund, while the homewoner has only $2,093,200 in equity in their house. If they both liquidate and sell out, the renter ends up $430,000 ahead after capital gains and real estate brokers fees.
Sure, buying a house is the best investment you can make, except for renting and diligently investing.
7:18pm I re-ran my scenario for someone who purchases a $1,000,000 home with a $192,300 down payment.
I get that they pay $3.2 million in all expenses in the 30 years it takes to pay off the mortgage. The house after 10 years is worth $8.05 million, not $16 million as you say. According to the OFHEO who tracks repeat sales of the same homes, the annual increase of homes here in Santa Barbara is 7.2% per year, so by the rule of 72, the house doubles three times in 30 years, up a factor of 8 to $8,000,000 from $1,000,000.
So the net profit of the homeowner is $3.8 million.
The renter/investor in this scenario has $9.7 million in their S&P 500 investment account, because the idea is that their rent+investment starts out equal to the mortgage+expenses of the homeowner, and the homeowner is now paying off a $807,700 mortgage, not a $210,000 one like in the first scenario.
The net of the renter/investor is $5.6 million, which exceeds the $3.8 million that the homeowner accumulates.
I agree with Don Noriega, by the way. It is odd that we focus so much on money. By mentioning the renting/investing strategy, I am trying to free people from the concept that they must own a house for financial reasons.
People can rent and invest and do just as well as homeowners. That is a liberating concept. At best, folks with low incomes who cannot possibly buy here should take heart and learn the alternative strategies for growing their wealth. Renting and investing for them is a whole lot better than taking out no-proof ARM loans that bring financial ruin.
And with the new Bankruptcy laws, the ARM loans pushed by real estate guys do bring financial ruin. It is way better for low-income folks to learn to invest in index funds.
7:24pm You're a good example of real estate folks... confront them with hard numbers, they freak.
I'm no stock broker, for the gazillioneth time. Stock brokers hate Vanguard funds like VFINX because a)stock brokers like to churn and burn, while VFINX buys and holds with the least commissions possible and b)the whole philosophy of VFINX is that throwing darts is at least as good as a broker (after correcting for commissions). Brokers hate that.
I keep saying that, now the 10th or so time.
Two groups of people to avoid are stock brokers and real estate people. Both only want commissions. If real estate brokers were as honest as Vanguard, they'd work for 0.2% commission.
I've made 12 of the previous 97 or so comments, not 25.
"Or, maybe you thought you would be 99."
Yes dear, and some days I feel like 99. There's a price to pay for being wise beyond your years...
Now, I'm considering a 40 yr mortgage can we run through those numbers again? This time with a little gusto?
And type s l o w l y, I broke three beads on my abacus the last time around.
Here is another article extolling the virtue of renting and investing.
Sure would be great if the pro-home buying folks could provide even one link to an analysis showing that home ownership is better than renting and investing. Even one comparison.
8:17 SA-1
Dear SA-1
You win on three points:
1. Money isn't everything. There is more to live than money.
2. buying a house is not a sure thing just as buying stock is not a sure thing.
You are right. good point well taken!
3. And yes as a renter my landlord is making money of of me. But my goal to to maximize my investment, so I can shut down my practice because the liability insurance is killing me! I have learnd that a luxury house is a poor investment because I can rent one and make twice as much money by placing that money in several low end houses. yes , for the cost of one high end house I can buy 5 low end houses. The combined rent on the 5 low end houses purchased with the same amount of capital is double the rent of the one high end house. Don't ask me why this is, but my guess is that it is because high end houses are way overprices but to rent one is way underpriced. a real bargain that I can't resist.
But you are wrong on one thing: On a 1031 exchange while it's true that the tax has to be paid someday. By doing a 1031 exchange the IRS ( bless their heart)allows one to re-invest 100% of the profit instead of paying say 255 tax and being able to re-invest only 75% of the profit.
So in effect one is allowed to invest what should be the governments tax money and make a profit on the 'free " money.
Also, my plan is to never sell but keep all the houses until I die. the wonderful IRS rules now forgive all the tax and allow my 4 kids to inherit the property without having to pay any tax on the profit that I made while I was alive. This is because the basis, which was very low while I am alive is re-set at the then current market value when I die.
The wealthy can afford this kind advice to LEGALLY avoid tax and get richer (bless this great country) while the poor get poorer.
But the opportunity to get rich by investing in real estate like I did is available to anyone . al they have to do is rent and invest in a duplex instead of the stock market. Let the tenants pay for your investment like I did. I tell you its a gold mine just waiting for ANYONE smart enough to take advantage of it. It's actually the ONLY way for a member of the middle class to get rich.
8:20 p.m ( also known as the stock broker)
You are right on the 2% increase in the taxable value.
I was wrong.
I thought you were trying to say before that the property tax was 2% of the increased value.
The tax is still 1% but the amount of tax goes up by 2% a year. This is still a super deal because by the rule of 72 the tax only doubles in 36 years while in 36 years the value of the house doubles 5 times.
so at the end of 36 years a $1,000,000 house appreciates to $30,000,000 but the tax is only 1% of $2,000,000 or $20,000 per year instead of 1% of $30,000,000 which is $300,000 per year.
But the person whom bought 30 years later got to take advantage of this tax 'subsidy" while the renter who invested in the market and has his money appreciate to only $3,000,000 after 30 years and now buys the equal house, as the original buyer, for the appreciated price of $16,000,000, and has to pay property tax of $160,000, per year along with his $60,000 per month payments and still has a loan of $13,000,000 against his new house.
While the original buyer now owns his same $16,000,000 house free and clear and has no monthly loan payments and his property taxes are $20,000 per year instead of $160,000 per year.
So buying is significantly better than renting and investing in the market for 30 years and then due to inflation finds out that all he now has it the down payment on the same house that the buyer now owns free and clear. all due to that wonderful power of L E V E R A G E !
numbers guy:
Sure renting and investing is the best investment you can make except for buying a house.
This is because buying a house has leverage to significantly multiply the appreciation, while renting and investing in funds does not.
This leverage feature of real state drives you stock brokers absolutely NUTS. Thats why you pretend it doesn't exist and present faulty reasoning and faulty math which does not truly take into account the reality of the leverage.
But we all know better. Thats why we all buy houses. And that ain't going to change anytime soon, my friend. HA!
Trying to fight with reality ain't fun is it? Thats why you lost this argument! The only person who believes that there is no leverage in real estate.
We are laughing at you all the way to the bank.
hey 8:20 p.m. numbers guy.
I am a numbers guy too!
You say the buyer and investor has $2,552,000 at the end of 30 years . this is CORRECT! But in 30 years it's only enough for a down payment on a house which is exactly what he had when he started)
But where you are dead wrong is what the buyer now has after 30 years.
Since Santa Barbaras houses appreciate at 10 % average per year they double every 7.2 years by the rule of 72.
So over the 30 years the $1,000,000 price doubles FOUR TIMES as follows:
1. Year 7.5 doubles to $2,000,000
2. Year 15 doubles to $4,000,000
3. year 22,5 doubles to $8,000,000
4. year 30 doubles to $16,000,000
you say at the end of 30 years the buyer has only $2,093,000
Just how can that be when his loan is now paid off and he owns a $16,000,000 house free and clear.
I say he now has $16,000,000 not $2,093,000 as you wrongly say.
SUMMARY;
renter has $2,552,000
buyer has $16,000,000 ( due to leverage)
Each made from the same $100,000 starting cash.
Gee, I wonder which one came out better?
Remember the total monthly payments he made over the 40 years was EXACTLY the same as the renter paid because the buyers were fixed while the renters increased 5% compound each year for a doubling each 15 years so at the end were double the payments of the buyer. The monthly payments of each can be ignored because neither is part of their investment but is their monthly cost of providing shelter.
I hope all the readers of this blog can now see just how just plain wrong your "funny" math is.
Don't you ever give up and admit defeat? You are making yourself look ridiculous. It appears as if your strategy is that if you repeat the same faulty reasoning enough times that you will end up having the last word and somehow win this argument.
Faulty strategy because no matte how many times you repeat it (now i've counted 30) someone is going to come right after you and point out how wrong you are. Care to go for another 30?
Most of you must be tired by now of scrolling :)
Anyone want to take a stab at a synopsis of the comments and ask a few questions for the next 106 comments? Either put it here for discussion or email it to saradelaguerra@yahoo.com.
Sara, I took a crack at a synopsis...
---------------------------------
Financially, which is better, owning a home, or renting? Per month, renting is more inexpensive, but when you rent it seems like your money goes to the landlord, and when you own, it seems like you pay yourself. That's why pretty much everyone in the US strives for home ownership.
There is also the advantage of *leverage*. If you make a downpayment of $100,000 and buy a $1,000,000 home, and if that home appreciates by 10% in one year, it looks like you've now got $200,000 where you used to have $100,000. It feels like you've doubled your money!
You made some mortgage payments, insurance payments, tax payments, not to mention some points and fees in addition to the first $100,000, however, which pro-home ownership folks tend to overlook.
A group of contrarians tried to take all those nuisance expenses into account, and the end up questioning the financial wisdom of home ownership. They've written about it at MSN, at get rich slowly, the Wall Street Journal, the Motley Fool, and and the housing crash blog.
They point out that you don't pay yourself when you buy a house, you pay a huge amount of mortgage interest to the bank, you pay the prior owner, you pay taxes, you pay insurance and maintenance and upkeep. And if you sell, you pay a whopping great commission - 5 to 7% on the full price of the house - to a real estate agent.
Usually you end up paying three times the value of the house over 30 years!
Whether or not you come out ahead depends on how fast the prices of houses rise, and what you might do with the money you saved by renting. Nationally over the 100 years from 1895-1995 homes did not appreciate at all relative to inflation. But Santa Barbara is different, and an unresolved question is... does Santa Barbara real estate rise at about 7% per year, or 10% per year?
Some have argued that if you diligently invest the money saved by renting, you can actually build your wealth faster than with a home purchase. Others argue that Americans are incapable of saving and investing, so that is an unrealistic alternative.
There are numbers galore on all sides of this issue. But beneath it all there is a deeper debate for Santa Barbara... if we encourage some housing, should it be for rent or for sale?
Sara,
here is your SYNOPSIS: ( done in the spirit of compromise)
1. One conclusion can be drawn from all this it's that buying a house or renting and saving 10% each payday and investing it in the stock market both come out about the same and both make one financially secure after 30 years. And that BOTH buying a house or renting, saving, and investing in the stock market are the best investment that one can ever make in their life.
2. We all learned that the average person does not have the discipline or will power to save much more than 1% of their income and so buying a house is a forced way of saving and investing.
3. We have all learned about the power of leverage and it's existence in the investment of buying a house.
4. We learned that the monthly payments of a buyer are not a part of the investment but are allocated as his cost of providing shelter and are an expense equal to rent over 30 years.
5. we learned that rent increases 5% compound each year and that both stock investments and a house investment appreciate an average.
between 7% and 10% a year
6. We learned that neither buying a house or a stock investment is a sure thing and that both have risks.
7. We learned that both have bubbles and corrections but that history always repeats itself and so both the stock and the house go right back to appreciating mode after the correction is over.
8. We learned the the bottom of this housing correction may be an opportunity of a lifetime for anyone who wants to buy a house and that the prices of houses will never be lower over the next 100 years than they will be at this coming bottom.
9. We learned that the coming housing bottom is going not going to occur for at least one year and most likely will occur somewhere between 1 and 3 years from now.
10. We have all learned about the wonderful power of leaving an investment in for a very long time like 30 years.
11.We all learned about the rule of 72. ( one can find out how many years it takes for something to double by dividing the number 72 by the annual rate of compound growth. ( compound growth is where one leaves the annual increase in to grow the following year along with the principal.)
12. We learned that there is much more to life than money. and that money alone will not make you happy. But it is sure nice to have.
13. We learned how buying a house can provide for retirement by providing a paid for house with no monthly payments. and can provide a nice estate to leave your kids, or a way to refinance and help your kids buy their own house.
14. We learned how buying a house gives one the security of knowing your landlord can't evict you, and the freedom to have a dg or to paint a wall purple or even to knock it out.
15. But the most important thing we leaned is that our american free enterprise system has powerful and wonderful opportunities for ANYONE ( and i do mean anyone) to get ahead by investing and to do that one needs to SAVE. And using that savings to either invest in a house or invest in Stock market.
16. so everyone of you: Start saving a full 10% of your paycheck starting next paycheck. make a budget to live on 905 of your pay. do without some materialistic luxuries and live more frugally and invest your savings in EITHER a house or the stock market and you too are on the road to building SIGNIFICANT WEALTH.
I truly wish you all a wonderful, sucessfull, and happy life.,
The following report by the government ,(shown below in its entirety) released today PROVES that the vast majority of all americans do not save in a significant way. 1/3 do not save at all and the 2/3 who save only accumulate enough money in their livetime of working to build up enought to allow them a monthly retirement income of 22% of their salary. This is in effect NOTHING, as compared to owning what will then be between a $8,000,000 to $16,000,000 house free and clear.
This proves that those who buy a house will at least have a fee place to live while those that don't won't even have enough saved to pay the cost of renting which is 25% of the average income that they made before retirement. so thei new 225 to live on won't even be enough to cover rent. these are the facts my friends:
Here is the government report just out today:
Many young workers have little or no 401(k) savings: report
Marketwatch - December 11, 2007 1:25 PM ET
WASHINGTON (MarketWatch) -- More than one out of every three workers at retirement age in the 2050s will have nothing saved in a 401(k)-style account, according to a government study released Tuesday.
On average, workers born in 1990 will save enough to replace about 22% of pre-retirement income, or $18,784 per year in 2007 dollars, according to the GAO.
"Today's workers will more likely struggle to make ends meet during retirement than previous generations," said Rep. George Miller, D-Calif., who had requested the report. "While Social Security faces long-term challenges that must be addressed, this GAO report makes it clear that the real retirement security crisis is the lack of savings in private retirement plans."
The projection of low savings in the 401(k)-style, defined contribution plans could be due to factors such as working for employers that don't offer a plan, choosing not to participate or withdrawing savings prior to retirement, the GAO said.
Defined contribution plans, which contained almost $3.3 trillion in assets last year, have become increasingly prevalent over the last 25 years, the GAO said. Participants in defined contribution plans grew to 64.6 million in 2004 from 20 million in 1980, according to the report, while participants in defined benefit plans gained to 41.7 million from 38 million during that same time period, the report said.
Experts have different views about how much individuals should save to have enough for retirement, it said.
"We may define retirement income adequacy relative to a standard of minimum needs, such as the poverty rate, or to the consumption spending that households experienced during working year," the report said. "Retirees may not need 100% of pre-retirement income to maintain living standards."
A November report from Employee Benefit Research Institute, found that the percentage of all workers participating in an employment-based retirement plan decreased to 39.7% in 2006 from 40.9% in 2005 -- fueled partly by a decrease in full-time, full-year workers.
"It may take a significant tightening in the labor market (like the one that occurred in the late 1990s) before the percentage of workers participating in an employment-based retirement plan significantly increases," according to Craig Copeland, the report's author.
The EBRI report found certain characteristics were associated with a lower level of participation in a retirement plan, such as being non-white, younger, female, never married, having a lower educational attainment, lower earnings, poorer health status, no health insurance through an employer, not working full time, not working full year, and working in service occupations or in farming, fisheries, and forestry occupations.
I'll take a closer look at both of the synopses later tonight...and maybe look at combining the ideas. Thanks for the input! They both look good.
11:41
Your synopsis is extremely faulty because you allocate 100% of the monthly house payments to be a part of the investment cost and fail to properly instead allocate it to the cost of providing housing.
Think if it this way. if you bought a $100,000 of gold bars and had to pay $1000 a month to store it in a storage building then ,yes, 100% of that $1000 per month is part of the cost of the investment BECAUSE YOU CAN'T LIVE IN THE PILE OF GOLD..
But you CAN live in a house that you buy as an investment. If you hadn't bought that house you would haver to rent one to live in. So you can subtract the cost of what it would cost you to rent that same house from your house payments as allocated to living expenses and not allocated to a cost of the investment.
Now this one fact CHANGES EVERYTHING. All those articles you mention are not unbiased but are written by stock brokers with just one intent of trying to show how investing in a house is not good as a way to try and get them to invest in the stock market instead. So each and every one of these is trying to be sneaky and underhanded and pull a fast one by trying to get people to believe that ALL of the housing payment is allocated to the cost of the investment as if it had no value at all in providing shelter in lieu of renting a place to live.
I can see right through this "funny math" and I assume that all our readers can too. Some people think that they can do anything with numbers to prove their point and some think just because someone wrote ann article and published it in some stock financial newspaper that it has validity.
I think these stock-writers know exactly what they are doing and in my opinion this makes it , if not criminal, downright underhanded and loathsome.
I absolutely despise anyone who spews forth this particular faulty argument, because it is nothing more than a boldfaced and deceiving lie.
There is a wonderful calculator that compares renting (and investing) with buying at:
the New York Times renting/buying calculator.
That calculator allows you to invest the difference between a mortgage and rent, and makes intelligent estimates of insurance, taxes, etc.
You know, 7:17pm, just saying other people (and respected ones, at that) are self-serving scoundrels doesn't make it so.
Many people turn your arguments around and believe that real estate agents are self-serving scoundrels.
It would be more convincing if you cited the articles that carefully and thoughtfully rebut the arguments (both numerical and other) against home purchases.
It would be more convincing if you presented hard data (including APNs) that shows that the majority of specific homes appreciate in Santa Barbara at a 10% annual rate. I don't mean Ellen's Montecito palace, but lots and lots of homes that the rank and file can buy.
To rebut your point... it turns out that renting to and accounting for the $ outlay paid to rent, and then investing the balance between the rent and home purchase costs, leads to a better financial situation (for life) than home purchases do. The New York Times calculator linked above, not made by a stock broker, verifies this claim.
Rent is not `money down the rathole'. You get a good and honorable service for the rent you pay, and most landlords strive hard to provide that good service.
Now, sure, it is possible to make a lot of money in real estate by being a landlord. But there are huge risks there too... one bad-apple tenant can wipe out several years of profit.
The amazing thing is that landlords and tenants can both profit a lot... isn't America great?
As for homebuying, as always happens in America (healthcare is another example) real needs get preyed upon by unsavory financial con-men. Lately it is the Wall Street and places like Countrywide that scammed low income folks into ARMs. Those people would have done much better to rent and invest, but all the financial porn convinced them homeownership was some kind of silver bullet.
And that, my friend, is far worse than any malfeasance you purport on the part of the Wall Street Journal or the Motley Fool and others.
5;11
Quit turning my words around.
It is not my words that make those writers liars.
It is the fact that they lie that makes them liars.
By your very words paying rent is not money down the rat-hole but one gets shelter value for what you pay. I never said otherwise and I agree with you. but my whole point is that the BUYERS ALSO get this very same value for their monthly payment so it is a lie to say that they don't and that 100% of the monthly payment is allocated to the cost of the investment just as if the house was sitting vacant.
My point was also that just because an article, written by a stock writer, about how poor an investment is, was published in some stock paper does not make that article valid because the writer had the purpose of seeing how bad he could make a house investment look. In his attempt top get people to rent and buy stocks instead. So their article is biased and slanted and uses faulty math and faulty assumptions. any person ( you are the prime example) , can prove anything with numbers by simply using a faulty scenario other than reality.
And thats exactly what all these writers did. Each gets their ideas from each other, just as you got your faulty ideas from reading these faulty articles with their faulty arguments and bought into it.
Let me give you one more analogy to see if you can grasp it. I have the felling that you are a person who takes 2 hours to watch 60 minutes.
A person buys two rare Ferraris for $200,000 each. One to not drive as an investment and one partially for an investment and partly to provide transportation. He puts $100,000 cash down on each and he pays the other $100,000 as a 5 year loan where the total loan payments principle and interest over 5 years are $120,000.
Over 5 years he puts 0 miles on one and puts 10,000 miles a year on the other using it to provide his sole transportation.
Now if he did not own a Ferrari he would have had to pay for some other car to provide this transportation. Say a Volkswagen would have cost him $30,000 over the 5 years so this is $6,000 per year transportation cost and value.
Now he sells both 5 years later when the priced of Ferraris goes way up to $300,000 each.
Now the one he didn't drive cost him a total of $220,000 so he made a $80,000 profit on it.
The other one cost him $220,000 LESS the $30,000 transportation value for the 50 ,000 miles if use over the 5 years. So his actual and real effective cost of the investment portion of the vehicle that he used was $190,000. So on that Ferrari his effective profit, taking into account the use received, was $110,000.
Now what you and those writers of those articles putting down investing in a house are doing is totally ignoring the value the buyer gets from the use of the house as shelter, which would be the same as you and them saying that the cost of the investment Ferrari, that the buyer used for transportation, was the full $220,000 of the payments and that his profit was only $80,000.
This treats both investments exactly the same by totally ignoring the value of transportation received.
And lastly, You claim that real estate brokers are bad. Yes they are. I agree with you 100%. but the fact that they are bad does not alter the fact that buying a house is a wonderful investment. the two have absolutely nothing to do with each other.
In a previous post you said that the housing correction when the housing bubble burst is now hurting the stock market. Well my friend it was the stock market correction when the internet bubble burst that caused all those stock investors to pull their money out of the market and invest it in real estate that caused the real estate market to go up so crazy. Do you think it only coincidence that the real estate market started to go crazy right after the stock market bubble burst.
The reality of ALL markets is that when they go up they always go up too fast and too far and all markets have corrections from time to time to bring things down to where they should be and then the process repeats themselves.
This is caused by greed of the INVESTORS and BOTH the stock brokers and the real estate brokers capitalize on it but they don't really cause it. it couldn't happen without the greed of the investors.
yes both the brokers make things worse by having the corrections be bigger.
but that does not alter the fact that both the stock market and buying a house are wonderful long term investments.
"You know, 7:17pm, just saying other people (and respected ones, at that) are self-serving scoundrels doesn't make it so."
Earlier this year, Goldman Sachs was bundling mortgage loans and then selling to investors as a bond. At the same time they were shorting those very same bonds in the derivitives market. (You think GS knew something the buyers didn't?)
In 2000, Merril Lynch bundled high tech stocks into mini funds (like todays ETFs) and sold those to investors at the derived market price. The price was run up very high as ML bid up the thinly traded stocks to meet demand before they sold the bundle to main street. After they sold out at the inflated price, the individual stocks crashed as the buying pressure eased up. (You think ML knew something the buyers didn't?)
Earlier this year, the CEO of Countrywide sold out a huge block of stock (hundreds of millions worth) just before the repo blitz went into full gear. Coincidence?
(Not unlike our very own SBIFF master (Ex-CEO)Barbakow did with THC just before they were indicted for medicare fraud...think we forgot jeffy?) THC sells for ~$3 from it's high of 50 somethin.
So tell me anonomoose 5:11 what would you call them?
PS:
I had to chuckle. #4 on a list of most overpaid jobs was Real Estate agents for luxury homes...
There is nothing at all wrong with renting.
Buying is NOT for everyone.
This discussion has been concentrating on a narrow subject of the investment aspect of real estate and whether or not one can come out better financially by renting, and investing the money otherwise spent on buying a house, or by buying a house.
The answer appears to be a draw, in that they BOTH come out the same and that either one is the best investment that anyone can make in their lives.
All this discussion about the money making potential of buying ones own house has nothing at all to do with the subject whether or not it's o.k. to rent.
Of course it's o.k. to rent. There is nothing at all, in the slightest, wrong with renting.
As we discussed, buying is a long term investment because all markets have timers when they are going up and times when they are going down. And there is some risk involved. If one loses ones job, or gets divorced, the house has to be sold, often at a loss.
Buying a house takes a huge down payment that young couples simply don't have unless they can borrow it from a relative. Also since houses are so very expensive here that the monthly payments are half of ones income. Many people don't want to make that kind of sacrifice and thats o.k.
Renting provides instant mobility where one can move to a different town to take advantage of a better job offer or a transfer, etc, notice. or even the freedom to go to europe for 6 months. There is no stigma of being a renter. Renters are not deemed second class citizens.
As a broker it's my job to help those people who have made the decision that they would like to buy, but don't think it's possible. The reality is that there is usually a way that it can be made to happen. That happens to be my specialty. A subject for a future discussion if Sara ever posts a blog asking for ways for one to be able to buy their first house. ( this assumes , of course, that they want to.
One of the best methods is to start small and work ones way up from a condo to a house and from ma small house to a bigger one. By selling every 5 years .
Also, for those that would like to be a homeowner and reap the may benefits, including the built -in wealth building aspect, but just cant afford Santa Barbara prices there is an answer . Buy a house in Ventura, a short 30 miles away, and commute. they are going to widen the 101 and install a commuter rail and bus system. Once the 101 is widened one can make the drive from town to town in 30 minutes.
We need to widen the 101 to accommodate those who commute because there are currently 20,000 more jobs here than housing units.
Lastly, the city of Santa Barbara needs to change their zoning ordinances to provide a significant incentive for developers to build rental units for the workforce instead of building high end luxury $1,500,000 huge units with 12 feet ceilings. These big units are not green, and do not live within our resources because they consume more materials and use twice as much energy as small rental units. The city needs to implement a dual zoning density system where luxury units may only be 4 to the acre, while low end small market $600,000 condos for the workforce are allowed at 8 units per acre but rental apartments are allowed 16 units per acre. such a system will work and would be easy to implement. All it talks is the political will to stop the gentrification of our community and to just say NO to big high end units.
Also, the city needs to do away with it's inclusionary housing ordinance because it has UNINTENDED CONSEQUENCES of forcing the developers to build only 6 huge high end luxury $1,500,000 units for every 1 affordable unit for the poor. the unintended consequence is twofold:
1. Under the cities present inclusionary ordinance there are NO new units being built for the middle-class workforce.
2. The 6 new high end luxury units for each one affordable units cause the city population to grow with wealthy people who then need more workforce to service them such as gardeners, maids, gas station attendants, waiters ,cooks and dishwashers, nurses, etc.
this in turn cause more workforce to move here to fill that demand for jobs and it INCREASE the current housing problem and actually makes it worse instead of better.
9:55am I don't agree with your characterization of those articles or my calculations.
The way we look at it... suppose the first, unused Ferrari is owned by A. A also rents a third Ferrari they use for all their transportation, for 5 years. Their rent + all costs of insurance, fuel, etc for that rented Ferrari adds up to $18,000.
Suppose the second Ferrari is used by B. B does all the same driving that A does, and when B adds up all his receipts for repairs, insurance, fuel, etc, B finds that they add up to $30,000.
Then B got a better deal than A, by $18,000.
You might wonder how the rent could be so low. That is a mystery in the real estate market right now, but it appears to be true. I suspect that people's desire to own has driven home prices up, and their desire not to rent had driven rent down. But it is also possible that all the crazy financial products in the home purchase market have hoodwinked folks into paying more than they rightly should. Or, it may be that rental properties are sold less frequently than for-sale residential units, and so landlords in practice don't escalate their rents as quickly as home prices. I don't know. Sounds like a good Ph.D. project.
sa1... sure, some in the stock business are bad. That's why personally I stick with Vanguard Index funds. I've never heard of Vanguard being in a scandal. Fidelity has been in scandals, although they have good index funds too, but I avoid them. The whole premise of index funds is that you can't trust info from the business people and/or analysts who tell you about any one company or stock. But you can be pretty confident that the total stock market will rise at 10% a year over a long time scale, like 30 years. Actually, for time scales over 20 years, stocks are more reliable than even federal bonds (well, that doesn't include inflation protected bonds, which are relatively new).
The articles I posted are not by Goldman Sachs or Merrill Lynch or in the case of patrick.net even by a stock-related person.
4:35pm Condos are really falling right now... it would be quite bad for a young couple to buy one now. Buying and selling every 5years would sure rack up the fees, points, and commissions that enrich the real estate industry and mortgage bankers.
As for inclusionary housing, I'm beginning to lean toward making it all rental, but make the default that renters have to invest in a Vanguard fund unless they opt out. Vanguard's STAR fund would be a good choice. Kind of like a 401(k), but in this case to strongly encourage people to save the difference between ownership costs and rent. It would even better if such investment could be tax advantaged.
But keep the investment portion out of the hands of scoundrels like Merrill Lynch and Goldman Sachs.
Good job with your last couple of posts Guru.
Thank you SA-1
Your comments are not so bad either!
6.56 p.m. ( a.k.a "the stock broker').
My friend, (we have conversed so much lately that I now consider you my friend),
You are absolutely right when you say that rent is comparatively low right now. It sure is!
I happen to know the answer, as to why?
The reason rents are so low is that rents have to be related to the amount of income of the middle class renters. The rental market cannot get much more than around 25% of the middle class renters income. because the middle class renter has to have enough money left over to be able to live.
Peoples income goes up an average of 5% per year. This is why rents also go up a corresponding 5% per year. Its no coincidence that they are the exact same increase each year! They simply cannot go up faster than the ability of the renters to pay.
Now the price of houses is different. It is essentially an auction. At any point in time there are, say, 100 houses for sale in Santa Barbara priced between $800,000 and $900,000. For illustration purposes lets call it a $850 ,000 house.
But at any point in time there are 200 qualified buyers whop are looking to buy a $850,000 house here. These 200 are in effect bidding against each other to see which 100 of the 200 get to buy the 100 $850,000 houses for sale. So its the 100 who are willing to pay the highest price that gets to buy.
So if the upper 100 are willing and can afford to pay, say, $860,000 and the lower 100 are willing to pay ,say, $840,000 then the sellers will not sell their house for $840,000 BECAUSE THE REAL ESTATE BROKERS KEEP THEIR CLIENTS UP ON WHAT IS CURRENTLY GOPING ON IN THE MARKET AND ADVISE THEN THAT THERE ARE BUYERS OUT THERE WHO WILL PAY $850.
The brokers play an important role in "controlling' the prices to fit the current market conditions. this keeps their clients from either selling too low or paying too much. this is fact the most important value of using a broker but I never ever heard anyone state this before now in quite this manner.
In other words brokers offer very valuable advice .
How the market actually works is that in an up market ( called a sellers market) when a house in a neighborhood, with 3 such identical houses, sells for $850,000, then the next identical house that comes on the market is priced at $855,000. When it sells the next is priced at $860,000. and on and on and on. part of this is because by the buyers who did not get that house now know that they have to pay more to compete with the other buyers. This could not occur without the brokers keeping close tabs on the current market activity.
Conversely , when the market is going down (called a buyers market), as it is now. When a house in a neighborhood, with 3 such identical houses, sells for $850,000, then the next identical house is priced at $845,000. When it sells the next is priced at $840,000. and on and on. Part of this is that the remaining seller s now have to compete for the next buyer and lower their prices to compete with each other for that buyer.
6:56 p.m.
Once again you are wrong in your analysis.
You say that A.A. rents a third Ferrari for $18,000.
Then you say that buyer B.B. spends $30,000 on his Ferrari for the same miles.
This is faulty thinking because the company renting the Ferrari has the exact same $30,000 expenses as the buyer and so would never rent it at a $12,000 loss for 18,000 but would rent it for the same $30,000.
So a correct scenario would be to have the rent also be $30,000.
What you did just proves my point that one can prove anything by math of one sets up faulty assumptions like you always do time after time.
I can see right through what you try to do because I have an 140 I.Q. and was a straight A student in math including both high school and calculus and numerous other math courses at the university. You will never pout one over on me with your 'funny math".
I sort of enjoy arguing with you because your arguments are always have so may holes in them.
The only thing thats frustrating is that you will NEVER ever admit you are ever wrong. and just keep repeating the dame old faulty arguments over and over even though I point out the mistakes in your reasoning and in your faulty math. So its like arguing with a stone wall. But just because you keep on repeating the same old faulty conclusions will NEVER make you right.
I wish we could each put up $10,000 as a wager, and have a University economics professor, with math expertise, decide who is right, and award that person with the $20,000. I would bet my life that you are wrong in this issue. it would be the easiest money that I ever made.
5:11 a.m.
the New York Times renting/buying calculator.
I clicked on your link to the above calculator and plugged in 5% per year rent increase and 8% per year house annual appreciation and your own recommended calculator said renting is only better for the first 2 years then buying passed it and went way ahead a much better investment by far for the last 28 years!
You can't even read your own calculator. ( You better take a course in BONEHEAD MATH.)
You just proved your own self wrong. AGAIN!
10:09pm sorry, you didn't read my post. There are no faulty assumptions... rent is simply cheaper than equivalent home ownership costs for the first 10 or so years of comparison. A fact.
If you invest the difference you come out ahead.
6:58am the calculator does not account for investments by the renter.
7:24 a.m.
yes rent is cheaper than buying ---a fact
but
You make much more profit in the house investment than renting and THAT IS A FACT.
( it's due to the leverage.)( that you conveniently keep ignoring)
So even though the cost of investment is double the profit is 10 times as much as renting so the net result is 5 times more profit by buying rather than renting.
You always "twist" things in your attempt to win by using faulty reasoning
6:58
then why did you cite it as proof that renting is better than buying when this calculator indicates otherwise.
also, even after adding in investing by the renter the buyer still makes more money,.
Also, you fail to add in the investing by the BUYER because after 15 years his payments are LESS than the renters and so at that time the buyer can start investing, and pull even more ahead.
You lost this argument long ago---it's time for you to bow out gracefully before you make even more of a fool out of yourself.
7:01am the calculator omits investments. No, when including investment by the renter, the renter makes more money.
Now investment by the buyer might even up the $. I'll check soon.
I've lost no argument whatsoever.
Renting and investing is simply a better solution for most people than buying. Remember the real estate industry has given out wildly inappropriate loans, all on the basis of total ignorance of the true costs of home ownership.
And now the foreclosure crisis threatens the US and the world economy. The Fed just started its 4th bailout attempt. Maybe on the 40th they'll finally succeed. More government tax dollars to the real estate scoundrels who are leading this country down to h-e-double ll.
The vast majority of people will do much better renting and investing than trusting the real estate industry.
Buying is far and away bette than renting and investing because after rent double in 15 years the renter no longer has any money to save and invest. So the whole argument of renting and investing is faulty because it is based on the faulty assumption that the renter will have any money left over to save and invest once his rent doubles.
Summary: The argument of renting, saving and investing, instead of buying, only works for the rich. It certainly does not work for 99% of middle class or the poor whom cannot save any money at all even though they rent. This is a fact as proven the the U.S., government statistics that americans currently only save 1% of their salary a year. A FACT that cant be ignored to make a faulty argument that saving is better. people simply cannot save. (an inconvenient fact for that blogger a.k.a. the stock broker.) This proves once and for all that the argument of renting is faulty and that its much better to buy ones house and in effect fix ones rent payments.
Renting and investing is way better than buying. Real estate brokers will try to get you into crazy adjustable rate mortgages with negative amortization because they'll tell you they are incapable of saving.
You can save, and *save for yourself*. Don't scrimp and save to pay a real estate broker and the bank. Scrimp and save and invest the money yourself in solid, prudent investments, like Vanguard's STAR fun.
Avoid pro-real estate nutters and stock brokers like the plague. Stock brokers hate Vanguard because they enable people to profit of the general rise in the stock market without paying off the brokers... Vanguard has never had a scandal and has the lowest fees in the investment business.
Correct that last post: Real Estate Agents always tell *YOU* that *YOU* are incapable of saving.
Prove them wrong! Save and invest in a solid investment like Vanguard's STAR fund or their Wellesley Fund.
I don't work for Vanguard. I'm not a stock broker. I just am sick of seeing the real estate guys exploit everyone.
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