Renters Gloat Over the Housing Slump

[Herman Munster]

http://biz.yahoo.com/weekend/rentgloat_1.html

The housing slump has been painful for millions of people who work in real estate or recently bought a house.

For Patrick Killelea, however, this year has been one long victory lap. Mr. Killelea, a 41-year-old software engineer, has long preached that it makes more economic sense to rent than buy homes. He recalls shouting "Wow!" when he heard about September's 9.7% drop in prices of new homes.

"I didn't want to gloat," he says. "But then again, maybe I did."

For years, Americans who refused to buy real estate at what they considered excessive prices were ribbed for failing to profit from one of the greatest booms in history. "Are You Missing the Real Estate Boom?" needled the title of a 2005 book by David Lereah, chief economist of the National Association of Realtors.

Now, with the housing market in a slump, renters who sat out the boom are finally getting some satisfaction.

Dean Baker, an economist, believes that the slump validates his decision to sell a two-bedroom condo in Washington's Adams Morgan neighborhood two years ago. Mr. Baker says he received $450,000 for the unit, which he had bought for just $160,000 in 1997. Since unloading the condo, he and his wife, Helene Jorgensen, also an economist, have been renting an apartment nearby for about $2,300 a month.

Mr. Baker concedes that he could have made an even bigger profit on the condo had he held it for another year or so but says it's impossible to time the market perfectly. While some economists argue that the housing slump is nearly over, Mr. Baker insists, "We're just at the beginning of it."

Mr. Baker has a history of forecasting bubbles early and often. He was quoted by newspapers in March 1997 -- three years before the tech-stock bubble burst -- as warning that equity prices were rising at an unsustainable pace.

[helderheid]

1. Strange. They're still paying someone else's mortgage.

:shrug:

[Warpy]

2. Plus they are vulnerable to rent hikes and they aren't getting the

tax deduction. Buying a modest house, especially in an area with rising rents (and they will rise as competition for decent housing increases) and seeing it as a hedge against high rent and as a tax shelter is still a decent idea. The operative word, though, is MODEST, and it doesn't apply to places where prices have gone nuts, like California and the northeast corridor.

I doubt that word is in his vocabulary, though.

[Kingshakabobo]

4. Exactly.

Market timing success stories are like a--holes - everyone has one. Bully for them.

I have friends/clients who are landlords and they are salivating at the idea of housing slow-down so they can raise rents. The landlords have been taking it on the chin the last several years. Here, in Chicago, a large number of apartments were converted to condos.....now, with the slow-dawn AND decreased rental inventory, the landlords will be in a much better position to raise rents.

It's the lower to moderate income people that will get squeezed.

[Mist]

8. I think you've nailed it, Warpy--as people realize they don't need

McMansions, or even mini-McMansions, small homes in modest neighborhoods will become VERY popular. I'm keeping my eyes peeled for just such a property.

[shireen]

3. i'm a renter. i'm not gloating over others' misfortunes. nt

[seabeyond]

6. good for you. and why should you. just mean. we own, we wont be hurt

and we wont be moving out of this home in forever, so how the market goes wont have effected me. and sad for the people being hurt in this economy, trying to put a roof over family head and food on the table, (not food ont he family)

[Rosemary2205]

5. This doesn't even make financial sense.

Even at depressed prices he'd still make an enormous amount of money over his purchase price. Instead of renting he should have sold when he thought the market in that area was going to change and then move to an area with more stable pricing and continue to recieve the benefits of home ownership.

In very few select markets does it make sense to rent rather than buy. Very few.

[Kingshakabobo]

7. Yep.

I would love to see his financial snapshot to see how he really screwed himself.

Say the market dips 10%??? How much did it cost him to miss out on that 10%? He had to pay a real estate commission of what? 5-6%? Not to mention his lack of an interest/property tax deduction for a couple years??? When the market DOES rebound, is Mr. Smartypants going to know the minute to buy? Or will he miss out on a couple percentage point bumps in appreciation?

[Rosemary2205]

10. Even more

paying rent instead of principle toward the house - possible loss of tax incentives on the interest of a mortgage - and/or the investment income his $2300 a month rent would have had if he'd have kept small mortgage on the other condo and invested instead. Even at a 50% loan to value refinance to access the new equity he'd have made out much better staying in his condo and investing in something else with a higher % return than his interest %.

[Raine]

9. Go ahead and "gloat' and

continue to pay someone else money that they are using to buy property with. "Gloat" while you are have your destiny controlled by someone else and you can't control the amount the rent can go up. :silly:

[ronnykmarshall]

11. Lucikly we bought our place in 1999.

My SO bought our place for $198K in '99. Right now the market value is around $650. Time and time again, I've had to talk him out of selling the place. I'm glad we're staying put.

[Warpy]

12. Even if the slump turns to a real crash and you lose 50%

of your paper profits, you'll still be way ahead. Your equity is building with every payment after that magical 5 year year mark in the amortization.

Just keep reminding him you'll still have to live somewhere, that the cash you gain from the sale of that house will not be enough to buy another place in the same area outright, that your mortgage will be at a higher rate, that you'll reset the clock on paying the mortgage off, and that there are the considerable expenses of moving to consider.

They do hate to see that paper profit disappear, though.

[ronnykmarshall]

14. You got it!

That's why we won't move.

Even if we were to sell now and make a good profit ... where would we go??

He's talked about wanting to get a house (we're in a condo) in either Silverlake or Los Feliz (we are currently live in West Hollywood) .. out taxes would probably double!

Only if we moved out of LA could we get more for our buck ... and I ain't moving!

[Eric J in MN]

13. I'm a renter, but I'd rather own a house and be paying

...off a mortgage, regardless of which direction housing prices temporarily go.

[enid602]

15. ARM

Just don't get into an ARM, or some such other creative loan.

[Fuzz]

16. My father told me today of a woman in an apartment he maintains

that owns investment property. She rents this apartment though. Small, one bedroom place, for 600/month. She does this because she can rent out her apartment in her building for 900/month, as well as the income from other units.

Interesting.