Monday, January 14, 2008

Should you rent or own a home - buying your first house

Should you rent or own a home - buying your first house
Rent or buy, determining if you should own a home or live in an apartment. I read and interesting article in US News and World Report about determine if you should rent or buy a home. Here is what the article said along with my comments.

Real-estate agents have been pushing the virtues of homeownership since homes were invented. Or since real-estate agents were invented, anyway. Paying a mortgage, they insist, is a can't-miss investment (the tax breaks, the appreciation, the thrill of fixing your own roof!). Renting is for simpletons who don't like keeping their own money. Another thing to consider in buying a home is if you take our a 15 or 30 year loan that loan payment, providing that you take a fixed interest rate loan will stay the same forever. Your rent will not stay the same. Any good landlord should be raising your rent on a regular basis.

But does owning a home really trump renting? With the economy stumbling, house prices falling, and credit tightening, many housing experts are questioning the conventional wisdom. Remember some day you want to retire. Do you really want to be paying rent or a mortgage when you retire? "Over the last decade, it may have been true," says W. Van Harlow, an economist at the Fidelity Research Institute. "Clearly, there are periods where [the housing market] will dominate. But give this market correction another 18 months, and it may not be true anymore." A lot of people made a lot of money in real estate over the last 5 years. Of course the market was over bought and there was speculation. People that got in late got burn because they bought high and sold low. Sort of the story of my life of investing?

Not so hot. The housing boom produced endless stories of homeowners getting twice what they paid for their homes. But "prices don't always go up," says Jay Butler, director of realty studies at Arizona State University. Even a boomtown like Phoenix has seen median rates of appreciation climb only 4.6 percent a year since 1981. According to a Fidelity study published this year, the return on a dollar invested in real estate in 1963 barely beat that of a low-risk treasury bill.

When the housing market slumps—as it has every 10 or 15 years for the past several decades—homeownership becomes little more than renting, from a bank. Without appreciation, buying a $400,000 house—instead of renting the same property for, say, $2,000 a month—can turn into an expensive, potentially money-losing proposition. Part of the problem here is the $400,000 house issue. That is what got a lot of people in trouble. The $400,000 house was their first home and they could only make the payments if both the husband and the wife were working. Even worse some people borrowed money on adjustable rate mortgages that that have adjusted and now they are screwed because the payment is too high. Assuming home prices come out of their death spiral (prices fell 4.5 percent in the third quarter compared with last year), they would still have to appreciate at 4 percent every year for a decade—even if rents climbed well above the rate of inflation—before a family would save more owning than renting. An $80,000 down payment could be invested instead in a mutual fund earning 8 percent, and housing comes with myriad other expenses, from maintenance to insurance to taxes, none of which build equity. The article fails to mention the size of what you are living int the quality of life of living in a neighborhood, the fact that you have a yard for your kids to play in and so on.

Tax breaks do ease the pain. But with the average family staying in a house only six years, homeownership during a slump (especially in foreclosure pits like Las Vegas and Tampa, where prices have dropped more than 9 percent since last year) can look less and less like the American dream. Vegas, Florida, Arizona, and California where totaly over heated markets. They markets were full of speculators that were buying second homes just for investment purposes and then they go burned.

Renting, meanwhile, has its virtues. It's cheaper in the short term, it offers maximum flexibility, and it pushes the headaches of maintenance and taxes onto landlords. Remember, he can, will, and should raise the rents over the years. It can also be a sound long-term investment. According to Fidelity, if renters save even $300 a month—the difference, say, between their rent and a monthly mortgage payment—that money, invested in stocks growing at only 4 percent, could add up to $114,000 in 20 years. (And that's on top of earnings on a down payment that never had to be made.) "Over long horizons, if you reinvest the savings," Harlow says, "you're probably not going to find that much difference between renting and buying." Saving hasn't proved to be the national forte, of course. But with the bloom off the homeownership rose, it may have to be soon.

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