Renting vs Buying... Can't find reason to buy!

[yellow heel]

I was doing some number crunching regarding renting vs buying a house. Seems like I will be throwing ALOT more money if (this is a big if) you minimize appreciation in the calculation. This is my situation so it may not applicable for anyone else since I live in very high COLA (silicon valley).

Currently I rent for $1195
(DW, DS and I are crammed into a 1br/1bth apartment so yes this is one of the cheaper places you can find in this area)

If I wanted a decent condo in a decent area, it will cost 500k (2br/2bth). With that said here is the parameter for the calculation:

Purchase price 500,000
Downpayment 100,000
Interest rate 6.5%
Principal amortization (years) 30
Property tax rate 1.25%
Annual maintainance 1000
Housing association dues (annual) 3600
Annual insurance 1500
Assumed marginal income tax rate 25%
General inflation 2%

Monthly mortage payment 2,512 interest compounds monthly
Total monthly payment 3,542 before tax

Total money I will throwing away if I bought: 2,870
This is the money after I factor in the tax saving from the interest. So it is (interest+hoa+property tax+annual maintainance+insurance) after tax. This does not include principal since it should add to the equity hopefully.

I will be losing more than $1600/month if I bought. To be fair if I rented a condo equivalent of 500k it will probably be around $2000-2500. I don't know if I can imagin myself paying $2500 for an APARTMENT!!

It will take me more than 20 years to recover the difference with 2% of annual housing appreciation AND if I didn't invest or gain any interest on the money saved on the difference and the down payment if kept renting.

I know a house is not an investment but with the uncertain economy (we just had a layoff) and the housing appreciation (or depreciation) I'm not sure now is the time to buy...

Even with that huge downpayment, the debt to income ration will be 4:1 so it will still be high. So I may be buying more of a home than I can afford.

I hope I confused everyone by now assuming you got this far in the post

I will appreciate any feedbacks or constructive criticism. FWIW, I used a detailed excel sheet that I found to calc all this.

Thanks for reading!

[wnlbutterfly]

I am assuming your DS is young? Aren't you going to have to find something a little bigger fairly soon? I just can't imagine a 1 bedroom apt with a teenager?

20-30 years down the road, do you want to be still sitting in an apt (that has no doubtedly gone up in rent) or sitting your own place that is paid? Home ownership probably isn't for everyone.

[LivingAlmostLarge]

Um, my only issue is that you are stuffing your wife and child into one room. How do you plan on uh having more kids maybe? To ask politely? I would feel very weird to have my child in my bedroom after say age 2-3. Even before to be honest.

So what would it realistically cost for you to rent a 2 bd condo? Also I know in CA, there are state laws (I lived in LA and SD) about how many people can be in a condo. In a 1 bd after I think age 5, you are legally obligated to get a room for the child. You cannot have more than 2 people per room, or you can get a fire marshall citation. This happened to a friend of mine because the neighbors hated them and reported the house of college students. The landlord kicked them all out.

I'm sure as parents you are perfect, but if they landlord runs into trouble, you could find yourself with a citation to boot.

Thus I'm sure you are considering renting a larger place right?

The mortgage rates are trending around 5.25% right now, so I would not use 6.5% unless you have bad credit also.

$400k @ 5.25% = $2208/month
Property Taxes (CA prop 13 so it never goes up) is $6250/year = $520/month
Maintenance 1% = 400/month or $4800/year
Home Insurance (seems high) $1200/year = $100/month

= $3228/month for PITI AND maintenance, $2828/month PITI

- $460/month principal , $1748 interest/month + 520 property taxes = $2268 or with 25% deduction = $1701/month realized interest.

$1701 + 100 insurance + $400 maintenance = $2200/month real money + $460 principal savings.

Yeah it's high. Mostly it's because of the assumption of maintenance.

Honestly you have to decide what's important to you. To my DH and I having a home, not moving, having kids and dogs is important. And we live in the same kind of price range area. But renting is just as great if you want flexibility, and no home maintenance.

[Joan.of.the.Arch]

Coming from a midwestern city, it is mindboggling to think that a 2BR, 2BA house has to cost $500K. How about looking for a 2BR,1 BA house? Would that get the price down? Around here, 2 BR houses generally were only built with one bath, or a bath and a half at most. But Silicon Valley is much newer, so maybe that type house did not get built in the area in the 1940-50s as they did in most American cities.

(Do you know that if you took your downpayment to my city and bought that 2BR 2BA house, it would be nearly paid for in total? Go east young man, go east.)

[disneysteve]

Originally Posted by wnlbutterfly

Home ownership probably isn't for everyone.

This is such an important statement that I'll say it again.

Home ownership probably isn't for everyone.

Much of the trouble in the housing market came about because various entities, including the government, ignored this fact and pushed to get everyone into a house. The problem was that many people simply couldn't afford a house, or buying a house didn't make good financial sense for them but they did it anyway because that's what we've all been brain-washed into believing is the American Dream.

Sometimes, renting makes a whole lot more sense. It might be because of your income. It might be because you don't expect to be in the area for very long. It might be because you are single and aren't sure when you'll get married and start a family. There are various reasons why renting could be the way to go. I think people are finally starting to realize that again.

[MonkeyMama]

Yellow HEel - where exactly do you live?

Your title caught my attention because I largely don't understand why most people do buy. I understand why people buy where we live - because often it is cheaper than renting, and because housing has a long history of big appreciation. But I don't understand it in regards to the rest of the country.

Anyway, then your post was very interesting to me because you live where I am from.

#1 - Prices have come WAY down the last few months. IT seems to me there are more reasonable options in the Bay Area. I guess it depends how picky you are. Our old 3-bedroom condo I just saw listed for $220k. I've never seen it priced below $260k, in 10 years. (IT was actually worth $500k last I looked a few months ago).

#2 - We bougth a condo in San Jose in 1999. It was FAR cheaper than renting - all costs considered. IT was 3 bedrooms. We figured we would ride the equity wave up to a HOUSE. We quickly became disillusioned. We decided it just wasn't worth it. I have come across very few who came to the same conclusion as us. But I think you are thinking in that direction. I have to tell you - It isn't worth it!!!!!!!!!!!! We actually picked up and moved to Sacramento. All of our friends and relatives - all of them - are so, "Oh we could never move. We can't! IT's impossible." Honestly, they are all full of crap. They choose to have $500k+ mortgages that's their choice. But it's something we could never understand on any level. Sure the Bay Area is nice - but we can visit every weekend and pay 1/3 the price for a house.

(Joan - a relative of ours paid $700k for a 2-bedroom fixxer. IT's probably worth $500k today. None of the homes built since the 50s are quite that small - there are plenty of old homes around).

Anyway, so I would strongly consider relocating. & if nothing else, I am sure you can find a condo I know you can find one for less than $300k. Probably under $200k if you are happy with one or 2 bedrooms. It might not be in a ritzy neighborhood, but it will do.

It's pretty much either increase your commute, relocate, or lower your expectations.

But yeah, prices in the Bay are far lower than they have been since we have been home owners. At least you have that. Honestly, rents are very expensive and if you own you get to deduct interest and property taxes for taxes. This is one reason owning can be more affordable - just FYI. We bought our first condo there because it cost about $1500/month, tax savings considered. The same place cost $2500/month to rent, in 1999. Not that we needed 3 bedrooms, but we found a good deal. We knew it was likely we could never afford more. That was why we bought when we did.

I understand rents have come down. I Can't say I would buy anything in the Bay today. I often think the place has mostly run its course. IT has appreciated 1000% since our parents bought in the 70s/80s. They were better off buying. Our grandma pays $30k/month to rent a "closet." I honestly think she would have been better off keeping her house. Taxes/insurace was a whopping $2k/year in comparison - and the place was kept up - not like it needed a lot of work. Those generations are where buying in the Bay made sense. But I think people buying today are pretty foolish to think the Bay has another 1000% appreciation left in it.

I apologize for the book, but I was once in your shoes.

[yellow heel]

Thanks all for your feedback.

Butter, Yeah, I kinda feel bad about stuffing my family in a 1bd/1bth. My ds is only 4month old so it is ok for now but its getting very tight to say the least. This was why we were discussing home purchase.
Just to be clear, I am not against buying. In fact I wanted to buy if all the numbers made sense but unfortunately, numbers do not lie. I will love to be able to own my home and have it paid off before I retire but I might have to look else where or win the lottery

LAL, my credit scor is not excellent unlike most peps here its around 700 when i checked beginning of this year. This is why I had my interest rate high than average to prepare for the worst.
I have looked a 2bd/1bath houses but it is in a less desireable area and they are very OLD houses. I see your maint is high but is this realistic for a condo or a house?

Joan, yes if I have the oppurtunity, I will move! I have considered moving back with my parents to help out but the DW did like that plan to much
My folks are in San Diego so it is also not cheap depending on the area.
I will be more than happy to take my downpayment else and pay off a house but for now it looks like it will sit in my low interest (1.65%) online bank.

Steve, apparently so! I always thought buying was the way to go but after doing some math, it was not as clear of a decision as one might have thought for me at least for now.

Hi monkeymama, I live in san mateo. Yes, I have noticed that prices have gone down through mlslistings but still it is very high. If I could find anything in the 200k-300k, I will be all over it but until then I don't think I have any choice.

[creditcardfree]

We just became full time military 2.5 years ago. I expect we'll be here another 2.5 years. We did purchase. We sure wouldn't make money, if we had to move today. We will consider renting, next time we move.

[LivingAlmostLarge]

YellowHeel, you probably have some time. I have no children so i can't say how long I'd feel okay with putting up with a baby. I would AT LEAST rent something bigger once the baby gets probably, at least me personally.

Sure it's expensive to rent, but so is buying. Both are fine decisions depending on the situation.

And maintenance depends mostly on the condition of the place you buy.

San Mateo isn't ridiculously expensive like silicon valley.

[yellow heel]

ccfree, that is great that you bought a house. If it fits your financial situation then I will buy also!

livinglarge, I think we are ok for the time being but I don't think we want to stay here any longer then we have to.

I did more number crunching and here are the magic numbers that might make buying affordable for me:

Calculation Assumptions:
Purchase price 400,000
Downpayment 100000
Interest rate 5.5%
Principal amortization (years) 30
Property tax rate 1.25%
Annual maintainance 1000
Housing association dues (annual) 3600
Annual insurance 1500
Assumed annual appreciation 2%
Assumed marginal income tax rate 25%
General inflation 2%

Monthly Payments:
Mortage payment(P+I) 1,694
Insurance payment 125
Housing association dues 300
Maintenance 83
Property tax 417
Income tax savings from interest deduction 448

Total monthly payment before tax 2,619
Total cash outflow(money thrown away) 1,852 (after tax and does not include principal)

With is scenario, if I can find a house for 400k and put a 100k down and loan at 5.5% and HOA at 300/month then I think that amount of money thrown away each month will be similar to what I wll be paying for rent if I was to rent something equivalent of the 400k condo.

What do you think? I think this was long the line of what you were calculating but I lowered the price point of the home and the interest rate but I also included the HOA back in since at this price it will most likely be a condo of some sort.

[JavaFalcon]

Well honestly it depends on whether or not you want to move again and if so how easily it would sell on the market today......or when you intend to sell it whether it has improved or gotten even worse.

[Finance007]

From what I heard from a friend in the mortgage industry .. they expect housing prices to start going up againa around sept. ... her advice what to buy a house now if you have the desire to be a home owner soon

[RefinanceRight]

Wow a real estate agent suggested to you housing prices were going to go up and you should buy right now.... Amazing!

[neatdesign]

Renting has a stigma attached to it that implies those who rent are somehow not financially responsible enough to buy a home. We've never owned a home and have always been renters, and for a long time I've felt a bit ashamed about that. We got into deep debt out of necessity (lack of employment, medical problems, etc) and because of it don't have enough for a down payment.

A couple of years ago we considered buying a small home with one of those no-down payment things, but are now obviously very relieved that we didn't. We also considered moving from our apartment complex (where we've lived in 1bed/1bath for 8 years) into a rented house, so at least we'd have a bit more space. Again, thankfully we decided to stay put, since a lot of private homes that are rented out are now going into foreclosure, forcing the tenants to find housing elsewhere.

So ironically, the downturn in the economy has started to wash away the stigma and shame that came with renting. Just the other day I heard a university professor being interviewed on NPR about the benefits of renting over buying, and was even happier when they said at the end of the interview that he was a Nobel Prize winner in economics. Well, if a Nobel Prize winner says renting is ok, then I'm fine with that!

~ Jenney

[Seeker]

Originally Posted by neatdesign

Renting has a stigma attached to it that implies those who rent are somehow not financially responsible enough to buy a home. We've never owned a home and have always been renters, and for a long time I've felt a bit ashamed about that. We got into deep debt out of necessity (lack of employment, medical problems, etc) and because of it don't have enough for a down payment.

A couple of years ago we considered buying a small home with one of those no-down payment things, but are now obviously very relieved that we didn't. We also considered moving from our apartment complex (where we've lived in 1bed/1bath for 8 years) into a rented house, so at least we'd have a bit more space. Again, thankfully we decided to stay put, since a lot of private homes that are rented out are now going into foreclosure, forcing the tenants to find housing elsewhere.

So ironically, the downturn in the economy has started to wash away the stigma and shame that came with renting. Just the other day I heard a university professor being interviewed on NPR about the benefits of renting over buying, and was even happier when they said at the end of the interview that he was a Nobel Prize winner in economics. Well, if a Nobel Prize winner says renting is ok, then I'm fine with that!

~ Jenney

Jenney, your "shame" is because you allowed circumstances to make you feel "shame." There's no shame in choosing to rent. Not in any realistic view of any personal situation. People make a choice to feel whatever. Nobody controls what any other person feels. We each control our own feelings.

However, renting in any major city in California, whether Northern, Los Angeles areas, is San Diego, is OFTEN more expensive than owning.

Multitudes of people rent in this state. And with the foreclosures, rents are not going to go down either; especially in the coastal areas.

There's nothing wrong, nor shameful, nor should there be any stigma against people whom need (yes, some people NEED to rent and not tie themselves down) or choose to rent.

Each person/family in this state, needs to look at their careers (will the job last through this economy?), their savings, and the costs associated with both options.

[yellow heel]

Originally Posted by Seeker

However, renting in any major city in California, whether Northern, Los Angeles areas, is San Diego, is OFTEN more expensive than owning.

Really? Maybe I'm missing something or you are referring so other areas but renting is not that cheap around here...

[Seeker]

Originally Posted by yellow heel

Really? Maybe I'm missing something or you are referring so other areas but renting is not that cheap around here...

Re-read my sentence. You're repeating what I just said. Neither renting nor ownership is "cheap."

Renting is going up here. I don't expect California to lower rents in any populated area. House prices may continue to fall, but I doubt that rents will fall at all.

People who don't want to sell (or cannot without a severe loss), are choosing to rent out instead (and hopefully sell when prices do rise in 5 years time or so). And some of the people whom have foreclosed, will move into these rentals instead; if they don't leave the state entirely.

I was writing to the perceived "stigma" -- which seems far away from anything I felt when renting or when I finally choose to buy. What other people think, seems foreign to me.

Do the math and figure out the pros and cons to you and your family with all the facts listed. Assign numbers to everything. Job, health, auto(s) etc. and make reasonable predictions for the future. Look at this often and adjust. Only you, your area, and your finances, can determine the best course for you and your family.

Good luck.

[Seeker]

Originally Posted by LivingAlmostLarge

$400k @ 5.25% = $2208/month
Property Taxes (CA prop 13 so it never goes up) is $6250/year = $520/month
Maintenance 1% = 400/month or $4800/year
Home Insurance (seems high) $1200/year = $100/month

Prop 13 only freezes properties purchased before 1978.

Those of us whom purchased after 1978 do indeed have rising property taxes. As time goes on, we (the younger generations) are paying an unfair burden of the property taxes for those people whom never move. But don't say the $'s do not go up.... they do indeed.

Prop 13 set the cap at 1% of assessed value.... we can submit a form and have the property reassessed when we feel we are overpaying.

[LivingAlmostLarge]

I bought in 2002 and property taxes were 1% of purchase price. Mella Roos can be applied depending on where you live. What it says on the tax data is it cannot hit more than 1% of the assessed value, and it's reassessed upon purchase. So if you keep the home bought in 1990 it's the same price.

California Tax Data

Most of my friends also bought and were not hit with rising property taxes. Not like I've been hit since we've moved out of state. So if you buy now in 20 years if you were in the same home, you've been paying the same.

I think MonkeyMama said the same thing.

[wincrasher]

What makes this decision complicated is that it still is an apples and oranges comparison.

Often times the property you can rent and the property you can buy are not equivalent.

I've often found that rental homes are very small and pretty beat up. Homes for sale generally have been brought up to a good condition to entice a sale and have more features, size, etc.

You also have to consider if you think pride in ownership, customizing a home to your own tastes, etc. has a value for you.

Of course, there are fantastic deals out there that can swing the value ratio radically. In this market that is what I'd do - search for an incredible deal.