The Owning v. Renting Debate a Year Later

A long-time reader reminded me the other day that it was just about a year ago that we had two posts and over 200 comments on the issue of owning versus renting.

my memory keeps remembering and reviewing those conversations on your blog where all those Santa Barbara real estate maniacs kept on pushing the wisdom of buying all those houses and leveraging money for the obvious utopia that would follow...Do you ever think about that? I wonder what they would say now?

I was reading how people in Riverside are abandoning their homes and clean up crews are finding expensive items and even left-behind passports and birth certificates in the aftermath. My, things have changed....

No, I don't think that will happen here...but if the renter advocates had been saving their money and getting out of debt, aren't they in a great position to buy today? Prices in Santa Barbara have been down by upwards of 35%, no? When homes can be $100,000 less than they were in December of 2007 -- why not buy?

Levy Foreclosure Marks End of an Era?

Saint Barbara over at The Santa Barbara Housing Bubble blog did a good piece on the construction at State and Mason where La Entrada aka "Levytown" would have been. Later in the post, she mentions that the Levy's have gone into foreclosure on their Hope Ranch home which is for sale at $9.8 million. Before you begin to feel somewhat sorry for Levy, who bought this rather large home from uber-attorney Barry Cappello for only $3.4 million in 1999, Saint Barbara speculates that the foreclosure beneficiaries are members of his own family.

One has to wonder if this is a sign of things to come but on a rather grand scale....how many other people do we know that have lived and spent beyond their means? On the other hand, Levy had a dream, went for it and gave it all he had -- not many of us have the courage to do that, whether or not we agree with the developed outcome.

Housing v. Renting Again!

Both synopses from the last post were very good and I will use both here even though it will make this a long post.

Part of the comment (unfortunately the links didn't stick) which our first anonymous at 9:04 AM said was:

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?

real estate guru doing his or her best to be objective enumerated a few things -- all of which could be discussed more.

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.

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.

Saint Barbara and the Housing Bubble

There's been a lot of discussion this week on this blog on the pending mortage collapse, home prices and surprisingly -- whether any of us have a right to live here and own a home. We've seen comments that have surprised me (like the assertion that a county or city job is lucrative) and a passion that only comes from either protecting your property rights and home value or staring at your pay stub every week and wondering how you could ever own a home in this town.

I want to give a shout to Saint Barbara over at Santa Barbara Housing Bubble -- a blog I've been reading for the last couple of weeks. She covers interesting tidbits about the real estate market. This week's post shows how Avery labels were used in a recent advertising circular to chase the market down.

Over the next six months, we will likely be seeing more home owners "chasing the market down". Are you ready? What does it mean to be ready anyway?

Qualified Intermediary or Common Thief?

(Please note: I made a few updates tonight (3/25) after finding out new information)

I read at The Santa Barbara Independent that local investors have lost almost $10 million when the fund of a local company, Qualified Exchange Services (QES), were found missing. This is likely part of a much larger scam involving perhaps $100 million in funds. I did some research and found that his is an unregulated industry that was set up to address the needs of the Internal Revenue Service's 1031 Tax Deferred Exchange. McGhan Medical Coporation (now Inamed) founder Don McGham has been charged with filing false financial statements.

The tax deferred exchange process is a way sellers of an investment property can sell their property and acquire a replacement property without seeing any taxable capital gain. In essence, the "qualified intermediary" (QI) holds the property between the sale and purchase of replacement property.

From what I understand, this business model is not structured to protect the customer. Although most QIs are honest and ethical -- and not all use this business model -- this is what can happen:

1) A QI can keep all or part of the interest on the funds held in between sale and purchase. There is no legal reason for this as the IRS allows customers to keep all of their interest. The IRS is considering changing this and taxing on the interest whether or not the QI is involved. (Update: actually the IRS is considering taxing the interest to the exchanger even if the QI keeps all or part of that interest. This would be a positive step for customers to become well aware of what
interest is earned on their funds).

2) Accounts are not segregated. QIs can mingle funds to maximize interest for themselves.

3) When accounts are not segregated, the risk of theft is greater. McGhan found that he could buy a QI and use the funds for his own purposes. Imagine using these funds to buy more QIs and having access to even more funds. Consider $10 million at 5.25% and you have monthly interest of $42,730.

I'm not an expert at this but it seems each of the sellers in this case have breached a fiduciary responsibility to their customers by giving up control of the funds they held without making sure they were protected. The customers have now lost their money and could not complete their exchange -- a double whammy from which they may not ever recover.

Home is Where You Park It.

Our friends at EdHat provided a link to a story on Santa Barbara's "mobile homeless" which made ABC national news recently after a national study showed that 3/4 of a million people are homeless in our country. If you don't mind the ads, the story has a video to go with it which shows the "parking lot shuffle" at a local parking lot at 7 AM.

I've seen a few people on BlogaBarbara take on the homeless like they should just move somewhere else. The truth is that people are being priced out of homes all over the country -- it's just happening here on a bigger scale. It's a regional, state and national problem that can't just be solved by sending someone to Bakersfield.

Lately, I've been wondering whether our insistence on owning a home is misguided...what's so great about it when you have property taxes, upkeep and $4,000 mortage payments? Did real estate's success in the 80s and 90s send us down the wrong path? Perhaps debt elimination and good old fashioned investment is more appropriate today...