Rent or Buy? It Might Be Time to Rent

[Mizmoon]

Sept. 30, 2004 — Although owning a home is the American dream, in light of the current environment in certain metropolitan areas, individuals looking to buy may want to consider renting for a bit longer.

Why? Because while the housing market has reached all-time highs, the rental market is incredibly depressed in many markets creating lots of values for consumers — housing prices have risen 25 percent faster than rents since the mid-1990s. With the national vacancy rate for rental properties at a record high of 10.5 percent, many landlords are offering incredible deals to entice potential tenants — such as a free month's rent — in those same areas where home prices have soared.

Why Should You Consider Home ‘Rentership’?

• Record high existing home sales: Record low interest rates over the past few years have created an unprecedented housing boom. In 2003, Americans purchased 7.2 million new and existing homes, an increase of 10 percent over 2002, and this year sales are likely to add up to 7.9 million homes by year-end suggesting prices might be near a peak.

• Soaring home prices: The prices of homes have skyrocketed in many markets, including Washington, Boston, New York, Miami, Los Angeles and San Diego. In fact, on average, median home prices nationwide have risen 47 percent since 1995.

http://abcnews.go.com/sections/GMA/MellodyHobson/Buy_Rent_Mellody_040930-1.html

*EDIT: helps if I include the link*

[phantom power]

1. Rent == money flushed down the toilet

However much you can afford to pay in rent, you're better off paying that same monthly amount into a mortgage.

If you're paying a mortage, some of that money builds equity. You never see your rent money again.

[ozone_man]

2. Not necessarily

The housing market is in a bubble now, which may soon be popped as interest rates head up. You could be left holding an expensive mortgage on devalued property. Not a good time to "step up" to that dream house or first time buyers. It's still hard to see this coming with all of the deficit spending of the last few years, but once that goes away, prices will come down in a hurry.

Renting now makes perfect sense to me. Wait 2 to 5 years for the prices to settle and then buy. The same with the stock market. Sell now and get in at the bottom.

[Catfight]

10. Kerry wins, I buy, if Bush steals another, I rent. Simple as that.

With Bush in charge the economy is way to shaky to purchase a mortgage and then lose my job. When Kerry gets in I'll know everything will stable out again and I can have the security knowing my job will be more advantageous if my employer takes the tax break to KEEP jobs in America.

[deadmessengers]

14. No difference

If Bush's economy catches up to you and you lose your job and are unable to make your monthly housing payment, you're still going to be out on your ass, regardless of whether that payment is going to a landlord or a bank.

There are times when it's appropriate to rent - for example, I wouldn't even DREAM of buying in a place like the SF Bay Area, Manhattan, or northern NJ right now - those housing markets are massively, enormously overinflated, and they're overdue for a correction (this is already happening in the Bay). On the other hand, in markets that are at the bottom of the curve, with good growth prospects, like Las Vegas, buying makes a lot of sense.

It's also not appropriate to buy if you can't commit to own that house/condo/etc for 5-7 years - whether you're living there or renting it out to someone else, and having them pay your mortgage for you. Less than that, and commissions and fees will eat up your equity, and you might end up getting back less than you paid in.

[Chicago Democrat]

16. Las Vegas... Do they have enough water? plus living in Las Vegas..

is that nice? I just left Bay Area back to Illinois 2 years ago, Chicago RE market is up like 34% versus down in SF like 9%. I love Chicago, but am thinking of maybe Wisconsin or even downstate Illinois.

A concern for me is terrorist attacks. With all the nuclear material around, its just a matter of time for a dirty bomb or an attack on a Nuclear plant happens. God forbid they actually get a bomb. All of which will make the land unihabitable forever. I think coastal cities like SF or NYC are the likely targets.Does anyone else think about this when deciding where to live? Am I just paranoid?

Another issue looming is water. Its nice to be near the Great Lakes; my tap water tastes good and is cheap.

[deadmessengers]

17. Las Vegas

I don't think LV's particularly nice - too damn hot for me - and water from the Colorado River is becoming increasingly scarce, something which will become an issue "real soon now".

But, a lot of people disagree with me and are moving there. It's the fastest-growing metro area in the US, and that makes for a strong housing market, as demand exceeds supply, and prices go up. That means "buy now", especially with interest rates being dirt cheap right now.

[Senior citizen]

3. Some mortgages are scams.

If they foreclose, you never see that money again either. Like when they help low-income people buy homes, helping with the downpayment and closing costs, and pointing out that the monthly mortgage payment is lower that their current rent, but neglecting to mention that when you get sick or the house needs repair or your car breaks down and you miss your payments, they get the house back.

San Diego has a boom and bust real estate cycle. If you buy at the bottom of the bust, your home increases in value with the next boom. If you buy at the top of the boom, you lose. Incredible as it seems, although this cycle is well known, people still buy at the top of the boom. Then their house becomes worth a lot less than they paid for it and they can't sell. Watch the cycle. Rent with the boom, buy with the bust. You know, like buy low, sell high.

[deadmessengers]

18. Mortgage scams

The thing to keep in mind about mortgage lenders is that they don't want to foreclose. Foreclosure is the absolute last resort for a lender. The reason is that real estate sells for a lot less in a foreclosure situation than it would in a market, non-duress sale (there are a lot of reasons for this that I won't go into here so as not to bore everyone into a coma). Usually, the lender is just looking to cut their losses and get what they lent on the house back - but they're not making any money on it.

Now, there are mortgage scams out there, for sure. The most common one is for predatory lenders to target an elderly person who has been living in their house for many years and has substantial built-up equity (maybe even owning their home outright), and pressure them into taking out a higher-than-market-interest home-equity loan that they have no hope of paying back. Then, once that person inevitably falls behind on the payments, the scumbags foreclose and take the house, and make a large profit on all that built-up equity. There's a special place in Hell for the people who operate this scam, but... it's not illegal.

[michaelwb]

5. Seizures

And not all states have laws protecting the consumer from the banks foreclosing when the real estate market collapses - i.e. the value of house declines below the amount you owe on the mortage. Then the bank seizes the house to protect their investment, and you are out everything. No home, no money.

This happened during the last real estate bust. Even folks who were still making mortgage payments on time lost their homes.

[West Coast Democrat]

6. This is not always true....

...especially if you're not planning on staying in the same home for at least 10 years. The costs of maintenance, as well as the interest on a mortgage, can ending being much more expensive than the costs of rent. And if your home ends up losing value or stagnating in the short term, you're not going to reap anything from the "investment." If you are lucky and happen to sell during a boom, and are able to move into another home that does not have a similarly over-inflated price versus the one you just sold, you might make a lot of money.

But generally, it's not a good idea to own a house because it's an investment. That should not be the motivation in buying.

[NashVegas]

7. Depends

Try living in someplace San Diego, where you can choose between a $3k monthly mortgage or half that in rent.

[freesqueeze]

8. This is only true if

your home value continues to go up. There are already many folks that are seeing their investment in their home evaporate. I'll bet there a plenty of people in the phoenix area that wish they could just pay off their lease and walk away from that cement anchor that some call a home.

[phantom power]

9. You're still ahead, even if your home decreases in value

The point is, as long as you can sell your home for any nonzero amount of money, you are ahead of where you'd be paying rent. Rent is money spent with nothing back. If I sell my home for $10, I'm $10 ahead.

Even if you are upside-down on your mortgage, and have to pay to get out of it, you could still be ahead, unless you would have spent less during the same period of time on rent. If I have to pay $20K to get out of my mortage, but I would have paid $25K in rent during the same period, I'm ahead.

Remember, this is all assuming my mortgage is the same as what I'd pay in rent. If somebody goes and takes out a huge mortage that they can't afford, then all bets are off.

[Warpy]

11. One caveat

Put as little down as you can possibly get away with. What you lose should home prices decline precipitously is your equity. Keeping cash on hand for the other financial emergencies sure to arise when this happens is better than sinking it into a home that is likely to lose as much as 20% of its value rather quickly, thus eating up every dime you put into it.As long as your PITI is equal to or less than rent, you'll be far ahead of the game, since you will still be able to deduct your mortgage interest at tax time, even if the mortgage is for more than the place is worth after the crunch.

In other words, if you want to buy, lower your expectations. Do you really need a 3 car garage, 3 bathrooms, and a two hour commute every day? Remember, that exurban paradise is going to look a lot less atractive when the current oil shocks are finally felt at the pump. Also, know the market. Everybody knows the California market is far overpriced and is due for a massive correction. However, if you're looking for a little slice of heaven in Arkansas, your risk will of financial disaster will be far lower.

Me? I bought a very shabby fixer upper in an inner city neighborhood as soon as rates fell. There's not much of a housing bubble here, since builders have been slapping up new suburbs on the fringes of the city overnight. Interest rates will likely halt building in this town, but prices are not likely to fall below what I paid for this dump 9 years ago. It's cheaper than rent, at this point, and that's really what you should be after.

[On the Road]

4. I am in Exactly That Situation Now

I was separated in 1995 and decided to rent because I didn't want to turn around and sell in a couple of years. (My parents always moved and flipped houses and it didn't do them any good.) In retrospect, it was a bad decision -- I should have bought and kept the house as a rental if I had remarried.

Since then, housing prices have more than doubled in the DC area, especially in Montgomery County MD. My rent went from $550 to $1117 for a 2BR in College Park (a pretty moderate neighborhood), and I just received notice of a $150 increase starting in December.

I definitely going to move. But prices are too high to buy. It's going to be rental city for another year or two until the market comes to its senses. It will.

[teryang]

12. it's a rentier's market

and will more clearly become that as time goes by. I expect home values to fall off in real dollars because the unreasonable increases in collateral costs, including state and local taxes and insurance, which burden the market. These are currently disguised by historically low interest rates.

Because of these burdens and other more tangible burdens such as depreciation and maintenance and uncovered casualty losses (deductibles and other loopholes in insurance coverages I call legal bad faith) a huge demographic will be abandoning their investments in primary residential homes in key markets. This trend will become evident within a few years.

The marketplace is becoming feudal like.

[Commie Pinko Dirtbag]

13. Creditors can't take your rented house away (nt)

[deadmessengers]

15. They can't take your owned house away, either.

...at least in most states - there are probably exceptions that I'm not aware of. A creditor who has successfully sued you and obtained a judgement *can* place a lien on your property. But, they do not have the right to evict you or foreclose on that lien, taking that piece of property. All the lien means is that when you sell that property, they get first dibs on the proceeds. In the meanwhile, you can live there as long as you make the payments to the bank.

If you declare bankruptcy, on the other hand, you can be forced to sell your house and lose any accumulated equity. I know Florida is one of the states that allows you to keep 100% of the equity in your house after bankruptcy - not sure about the others.

IANAL (I am not a lawyer)
IANAA (I am not an accountant)
IANAAQTGYTA (I am not at all qualified to give you this advice)