5 ms·

Majority of Renters Are Not Saving for Down Payment: Freddie

40 points by PretzelFisch 11y ago

hacknat 11y ago
I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Most of my savings goes to retirement, which is now in the realm of being a down payment for a nicer house. Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house. When I'm older, and I'm not trying to play catch up on my retirement account, like so many 40 and 50 year olds end up doing, more of my income can go to other things, maybe even a house. I'm super focused on my career and family right now. Why would I want to buy what amounts to a giant time sink? Bottom line, by focusing my time and money on personal growth. I'll be in a much better position than if I bought a home. When you just do the game theory on the American Dream, it makes no sense at all. Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet.
- totalrobe 11y ago
  Totally depends on where you live. Some areas rent is much more than a mortgage and vice versa.
- kazinator 11y ago
  You could get a place that isn't a "fixer upper". If there is grass, let it grow three feet high. > Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet. It really depends. Rent is also money down the toilet. If you're "old" now, and you bought a house when you were "young", and properties have gone up in your area, then if you still have the mortgage, the remaining payments are probably very low compared to what people are paying in rent. Rents don't have compound interest but they rise up and up over the years and decades. And every single dollar is wasted. Of course, the specific reasoning depends on the area, especially over shorter terms.
  - toomuchtodo 11y ago
    > It really depends. Rent is also money down the toilet. Rent = mortgage payment + premium to be able to walk away.
    - chubot 11y ago
      Also property taxes -- and in many cities condo / co-op fees. I find it odd to see people stretching themselves to the limit to "own" property, when it actually means they have even more "landlords" than before (the IRS, the bank, and often the condo association). I live in SF and renting is a great deal! (admittedly, as long as you are not looking right now :-/ ) I would consider buying something relatively big in a small town that you can really own, but I don't see the appeal of these tiny starter "homes" in big cities, with so many strings attached.
- increment_i 11y ago
  I had the opposite experience - I never really had the desire to own a home until I had children. Once I had them, I really wanted one. Although I have to admit, paying a mortgage does make me feel slightly like a sucker.
  - maaku 11y ago
    Wait until rents go up and your mortgage does not.
    - drpgq 11y ago
      Depends where you live. I live in Ontario and fortunately for me there's rent control
  - maaku 11y ago
    Wait until rents go up and your mortgage does not.
  - DrScump 11y ago
    Owning makes you feel more like a sucker than renting?
- logicfiction 11y ago
  Home buying requires certain priorities. I think you outline a different and successful financial path through life. I don't agree that home buying, in contrast, makes no sense at all. While you are correct that compound interest does amount to possibly a couple hundred thousands of dollars lost, I think that needs to be compared to the cost of renting. Two very conservative assumptions: 1. over 30 years (standard mortgage) your home/condo value only stays the same as your purchase price. 2. The rent on your apartment never goes up. In the Boston market I rent a rather dumpy and small 2 bedroom apartment for $1600 a month, which is most likely already below market value. If I stayed here for 30 years at this price it would cost $576000, all of which would be completely sunk money. Decent to nice condos in the area range from say $350k to 600k. The money lost to interest in that range is at worst only a couple hundred thousand over 30 years. Meanwhile you have a nicer place to live and equity in the property. Obviously very simplified scenario, but I don't think buying a house/condo when you are relatively young amounts "to flushing hundreds of thousands of dollars down the toilet" anymore than renting does.
- nsxwolf 11y ago
  A lifetime of hearing "rent is just throwing your money away" propaganda from my family convinced me to buy a condo just before the housing market crash. Result: That condo is worth half what I paid. I got married and had children so we bought a house, but I am now a landlord for the foreseeable future. It sucks. I really wish I'd thrown my money away all those years - I wouldn't have this constant source of interruption and expense hanging around my neck. My advice for anyone who really wants to buy a house... I would suggest trying to make sure it's the last house you'll ever need.
  - pxeboot 11y ago
    I did the same, except values never dropped where I was at. Sold for a 20% profit 3 years later. Real Estate prices are extremely local. There are many places where buying will likely never payoff. In other parts of country, renting is significantly more expensive then buying a similar home.
  - wahsd 11y ago
    Not to rub it in, but something many people also don't consider when looking at condos is that there are generally speaking condo fees associated which can easily run $300-$800 for a run of the mill condo depending on amenities. There's also a dirty little secret that really doesn't get a lot of air time, many of the condos have what are essentially builder / developer royalties that go to the developer in perpetuity. So, on top of dropping 5 digits on closing and paying thousands in property taxes, you get to pay monthly fees and part of those go to the developer that built the complex with lowest bidder and shoddy illegal immigrant labor.
    - sliverstorm 11y ago
      $800? A month?
      - e15ctr0n 11y ago
        Here is an overview of what is involved in condo fees: https://thebaverstockteam.wordpress.com/yesterdays-news/everything-you-need-to-know-about-condo-fees/ https://thebaverstockteam.wordpress.com/yesterdays-news/ever... Here is a reddit discussion from 2 years ago: https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_are_ridiculous_what_options_do_i_have/ https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_...
- encoderer 11y ago
  > Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house I'm interested in the analysis here. This is a thought I'd considered and when I ran the numbers they were about the equal. You're buying a house on margin with just 20% down. With 3% appreciation your house has appreciated 80% in 20 years. You're earning 400% roi. For the portfolio, if you're averaging 8% you're returning 466%. So the portfolio still wins, right? But no so fast: you don't owe a dime of taxes on that $80k appreciation. Anyway, your argument was beyond just ROI, but i'm interested if you have any thoughts about that?
  - thrownaway2424 11y ago
    You wouldn't expect a house to appreciate 3% per year over any significant length of time. In the long run, houses are a wash.
- foobarian 11y ago
  Counterpoint to the "It doesn't make fiscal sense to buy a house" argument: I didn't buy a house to make money, there are better ways to do that. I bought a house for quality of life reasons, such as - have a big yard, - be able to nail things to the wall or paint them without asking permission, - no fear of landlord selling the house and me getting kicked out - custom improvements I put into the landscape or the interior will not be wasted
- ChuckMcM 11y ago
  The interesting thing about buying a house for me was that it capped my monthly housing expense. Rents can go up, you can get evicted, you can have your house burned down by your neighbor. Owning a house allowed me to plot a lifetime expense versus my retirement savings. Generally I worked backward from 70 which was the point at which I got maximum Social security to what ever was the current present, and then looked at an annualized model of costs from there to the present. Once I had the model I could plot my earliest retirement date backward from 70 as time passed. Sort of like the two trains leave the station, where will they meet. The only reason I bought the house was that my need to live somewhere was a given, and owning removed a host of variables from my model which were hard to predict. Rather than thinking of it as an investment it acted more like a cost shield which meant as my income grew all of the additional growth could go into retirement rather than being allocated to higher housing costs.
  - barrkel 11y ago
    Maintenance and repair make owned housing a little bit more unpredictable than you suggest - get unlucky with something like subsidence, and you could be facing dramatic spikes in insurance rates and a much harder time trying to sell should you want to move.
    - uptown 11y ago
      Subsidence? Extremely, extremely low odds of that factoring into the vast majority of properties.
    - ChuckMcM 11y ago
      Actually maintenance and repair can be modelled fairly easily (and as I found out I over modelled it) I used $5/sqft/year as a maintenance cost. That was based on information from Popular Mechanics on home repairs, a reader's digest survey, and a blend of roofing/painting/carpeting divided by 15 years. For my house at 2500 sq feet that comes out to $12,500 (or about $1000/month). Actual costs were closer to $600/month but living in California meant things like winter/summer cycles are not as hard on the house. I analyzed the cost of moving against the cost of renting it out and buying a new place which has its own interesting quirks. My wife's parents did the keep/rent the previous house each time you move thing while my parents simply rented until my Dad retired. In retirement my wife's parents have a built in cash flow that my parents do not. Insurance has been the most variable with California adding earthquake and flood insurance requirements. As a component of cost has varied the most (it isn't included in the $600/month which is just maintenance). On the plus side, with California's no pre-payment penalty I could always use bonus money to pay down the mortgage which both kept its value in the future and mitigated future interest expense. That was always a better net use of cash funds over a savings account. I've always maintained a line of credit on the house which could allow me to "re-access" that value if something unexpected happened. Not for everyone of course but its a different way of looking at home ownership which isn't commonly discussed.
- jseliger 11y ago
  I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Also, my job is not to feed into the mortgage-finance-housing industrial complex.
- datashovel 11y ago
  To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye opening when I did some numbers a while back (can't vouch for whether this is still accurate today, but my hunch is it's not far off). If a person pays minimum monthly payment on a 30-yr mortgage (assuming certain interest rates) you ultimately end up paying approximately the cost of the house in interest over the life of the loan. This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.
  - potatolicious 11y ago
    This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html
    - datashovel 11y ago
      I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
    - datashovel 11y ago
      also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.
- lewisl9029 11y ago
  Another point most people don't consider is the fact that a mortgage is essentially a very heavily leveraged (often 10x+) investment in real estate. Example: Consider a $500k mortgage with a $50k down payment (10x leverage). A 5% drop in value on the $500k home means you've lost 50% of your principle investment (-$25k), and vice versa with gains. Most investors have rather modest risk profiles and would never consider a 10x leveraged investment of any other type, but for some reason they give no second thoughts to putting down money for a 10x leveraged mortgage. I personally would rather pay the fixed monthly expense of a rent rather than exposing myself to the risks of a 10x leveraged investment.
kazinator 11y ago
I suspect that renters magnify the difficulty of getting a property, which psychologically prevents them from seizing the opportunity. You need less money down than you think. The income is the important thing.
- toomuchtodo 11y ago
  Sort of. Yes, you can get away with a 3% down payment with an FHA loan. But 3% is still $6K on a $200K property, even more if you're trying for a $250K or $300K property. That doesn't include closing costs, nor an emergency fund you need for homeowner expenses that traditionally come up. Sure, you can afford the house at closing. Are you financially well off enough to afford it for the next 15/30 years (depending on loan term) so as to not lose your equity? Probably not, and that's not going to get fixed until incomes start rising.
  - kazinator 11y ago
    Counterpoint: the question you're asking has to be asked about renting also! Are you financially well off enough to afford what the rent is going to be over the next 15-30 years? If you aren't well off enough for the mortgage or the rent, then you're fucked either way. Now suppose we equate mortgage with rent, and declare that the payments you're making aren't contributing to equity---they are just pure rent. Then the equity you have in that $200K property is the $6K you put in. That is what is at risk relative to renting. (Of course we are ignoring the effects of location. Relative mortgages versus rents and the longer term picture in a given area and such.)
    - 33a 11y ago
      If the rent gets too high, you can just move. If you lose your job, good luck dealing with that mortgage. The problem with buying a place is you get stuck in one location.
      - jdmichal 11y ago
        So your answer to rising rent is to constantly move to comparatively worse and worse locations? Because if rent's going up, it's going up everywhere. So to get a lower rent, you're talking about downgrading.
geggam 11y ago
One has to stay in a house 5 years to break even on buying it. I am not sure the current employment landscape is conducive to that sort of commitment.
- pmorici 11y ago
  That's not true. The amount of time you need to stay in a house vs. renting is variable base on a number of factors. Among them are the cost of the house you would buy compared to the cost of rent among other considerations. Google "Rent vs. Buy" and you will find a number of comparison calculators. The one from the NYT is particularly good and tells you how long you need to stay in a particular house to make it better than renting financially speaking. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
- craigyk 11y ago
  Of course it depends on location and timing, but I sold my last home of 6 years and walked away with 180k. Discounting what we paid in mortgage over that time we probably only netted like 40k or so... but compared to the hassle and cost it would have been to rent a place big enough for two dogs, two cats and two kids I'm probably 300k richer than I would have been renting.
alistproducer2 11y ago
People should really do their homework. Find an online interest calculator and see how much interest you pay over the life of a 30 year loan. Even at these historically low rates it's about double the sticker price. Also look at the amortization schedule. Unless your house appreciates considerably ever year, you will pretty much always sell at a loss when you factor in the interest paid over your time as owner. This is not even including incidental expenses like appliance repair or extra warranties hi might purchase to "protect" you from said incidental costs. In short, from a financial standpoint the math on buying a house with a mortgage never works out in your favor. It's not even close. I am looking at this from a purely mathematical standpoint. I do undere that there are qualitative reasons that owning beats renting; however, I'm sick of hearing people try to make the case that a home is an investment, which is true only if you ignore the interest paid. EDIT: if you did sell early in in the loan you could treat the money lost to interest as an implicit rent. This makes me laugh because you could've just rented in the first place and had the benefit of mobility and avoided the headache of putting a house on the market.
- nitrogen 11y ago
  Does this take the mortgage writeoff into account? Even if you're effectively paying rent to the bank instead of a landlord, does the writeoff not make up the difference, especially if you sell in the earlier years of the amortization schedule?
  - alistproducer2 11y ago
    A write off is worth the amount times your tax rate. This will mitigate the loss but won't come close to eliminating it.
- akira2501 11y ago
  > Find an online interest calculator and see how much interest you pay over the life of a 30 year loan. Then go to a cost of living calculator to see how much the inflation trend of 30 years minimizes that. The dollars you pay at the start of your loan have much more value than the dollars at the end; it tends to take quite a bit out of the "sticker shock" of just looking at the "total interest paid" column of an amortization schedule.
thrownaway2424 11y ago
Majority of Germans also not saving for down payment. Only America is deranged about home ownership.
- peteretep 11y ago
  Not only America - Germany and France are the exceptions, not America.
thedz 11y ago
IMO, the biggest thing in being happy with renting vs buying isn't the monetary factor, but in how ready someone is with owning. Owning comes with a lot of advantages: home renovations, settling in and making something your own, building property value over time, a stable monthly mortgage payment, that pride that comes from saying you own something. But it has a lot of other factors to: being responsible for repairs, landscaping, property taxes, less flexibility if you need to relocate. The "renting is throwing your money away" line is prevalent, but is also a gross simplification of the rent vs buy decision.
- cinquemb 11y ago
  So if one doesn't care about home renovations, building property value over time, that pride that comes from saying you own (but mortgage == owning something fully in x0 years?) something, and wont mind moving if prices change, then it seems like one should stick to renting?

40 points by PretzelFisch 11y ago

I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Most of my savings goes to retirement, which is now in the realm of being a down payment for a nicer house. Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house. When I'm older, and I'm not trying to play catch up on my retirement account, like so many 40 and 50 year olds end up doing, more of my income can go to other things, maybe even a house. I'm super focused on my career and family right now. Why would I want to buy what amounts to a giant time sink? Bottom line, by focusing my time and money on personal growth. I'll be in a much better position than if I bought a home. When you just do the game theory on the American Dream, it makes no sense at all. Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet.

totalrobe 11y ago
Totally depends on where you live. Some areas rent is much more than a mortgage and vice versa.
kazinator 11y ago
You could get a place that isn't a "fixer upper". If there is grass, let it grow three feet high. > Taking compound interest into account, buying a house when your young amounts to flushing hundreds of thousands of dollars down the toilet. It really depends. Rent is also money down the toilet. If you're "old" now, and you bought a house when you were "young", and properties have gone up in your area, then if you still have the mortgage, the remaining payments are probably very low compared to what people are paying in rent. Rents don't have compound interest but they rise up and up over the years and decades. And every single dollar is wasted. Of course, the specific reasoning depends on the area, especially over shorter terms.
- toomuchtodo 11y ago
  > It really depends. Rent is also money down the toilet. Rent = mortgage payment + premium to be able to walk away.
  - chubot 11y ago
    Also property taxes -- and in many cities condo / co-op fees. I find it odd to see people stretching themselves to the limit to "own" property, when it actually means they have even more "landlords" than before (the IRS, the bank, and often the condo association). I live in SF and renting is a great deal! (admittedly, as long as you are not looking right now :-/ ) I would consider buying something relatively big in a small town that you can really own, but I don't see the appeal of these tiny starter "homes" in big cities, with so many strings attached.
increment_i 11y ago
I had the opposite experience - I never really had the desire to own a home until I had children. Once I had them, I really wanted one. Although I have to admit, paying a mortgage does make me feel slightly like a sucker.
- maaku 11y ago
  Wait until rents go up and your mortgage does not.
  - drpgq 11y ago
    Depends where you live. I live in Ontario and fortunately for me there's rent control
- maaku 11y ago
  Wait until rents go up and your mortgage does not.
- DrScump 11y ago
  Owning makes you feel more like a sucker than renting?
logicfiction 11y ago
Home buying requires certain priorities. I think you outline a different and successful financial path through life. I don't agree that home buying, in contrast, makes no sense at all. While you are correct that compound interest does amount to possibly a couple hundred thousands of dollars lost, I think that needs to be compared to the cost of renting. Two very conservative assumptions: 1. over 30 years (standard mortgage) your home/condo value only stays the same as your purchase price. 2. The rent on your apartment never goes up. In the Boston market I rent a rather dumpy and small 2 bedroom apartment for $1600 a month, which is most likely already below market value. If I stayed here for 30 years at this price it would cost $576000, all of which would be completely sunk money. Decent to nice condos in the area range from say $350k to 600k. The money lost to interest in that range is at worst only a couple hundred thousand over 30 years. Meanwhile you have a nicer place to live and equity in the property. Obviously very simplified scenario, but I don't think buying a house/condo when you are relatively young amounts "to flushing hundreds of thousands of dollars down the toilet" anymore than renting does.
nsxwolf 11y ago
A lifetime of hearing "rent is just throwing your money away" propaganda from my family convinced me to buy a condo just before the housing market crash. Result: That condo is worth half what I paid. I got married and had children so we bought a house, but I am now a landlord for the foreseeable future. It sucks. I really wish I'd thrown my money away all those years - I wouldn't have this constant source of interruption and expense hanging around my neck. My advice for anyone who really wants to buy a house... I would suggest trying to make sure it's the last house you'll ever need.
- pxeboot 11y ago
  I did the same, except values never dropped where I was at. Sold for a 20% profit 3 years later. Real Estate prices are extremely local. There are many places where buying will likely never payoff. In other parts of country, renting is significantly more expensive then buying a similar home.
- wahsd 11y ago
  Not to rub it in, but something many people also don't consider when looking at condos is that there are generally speaking condo fees associated which can easily run $300-$800 for a run of the mill condo depending on amenities. There's also a dirty little secret that really doesn't get a lot of air time, many of the condos have what are essentially builder / developer royalties that go to the developer in perpetuity. So, on top of dropping 5 digits on closing and paying thousands in property taxes, you get to pay monthly fees and part of those go to the developer that built the complex with lowest bidder and shoddy illegal immigrant labor.
  - sliverstorm 11y ago
    $800? A month?
    - e15ctr0n 11y ago
      Here is an overview of what is involved in condo fees: https://thebaverstockteam.wordpress.com/yesterdays-news/everything-you-need-to-know-about-condo-fees/ https://thebaverstockteam.wordpress.com/yesterdays-news/ever... Here is a reddit discussion from 2 years ago: https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_are_ridiculous_what_options_do_i_have/ https://www.reddit.com/r/Frugal/comments/1ektio/my_hoa_dues_...
encoderer 11y ago
> Assuming my portfolio does the same as the worst 25 years of the S&P 500, it will still beat buying a house I'm interested in the analysis here. This is a thought I'd considered and when I ran the numbers they were about the equal. You're buying a house on margin with just 20% down. With 3% appreciation your house has appreciated 80% in 20 years. You're earning 400% roi. For the portfolio, if you're averaging 8% you're returning 466%. So the portfolio still wins, right? But no so fast: you don't owe a dime of taxes on that $80k appreciation. Anyway, your argument was beyond just ROI, but i'm interested if you have any thoughts about that?
- thrownaway2424 11y ago
  You wouldn't expect a house to appreciate 3% per year over any significant length of time. In the long run, houses are a wash.
foobarian 11y ago
Counterpoint to the "It doesn't make fiscal sense to buy a house" argument: I didn't buy a house to make money, there are better ways to do that. I bought a house for quality of life reasons, such as - have a big yard, - be able to nail things to the wall or paint them without asking permission, - no fear of landlord selling the house and me getting kicked out - custom improvements I put into the landscape or the interior will not be wasted
ChuckMcM 11y ago
The interesting thing about buying a house for me was that it capped my monthly housing expense. Rents can go up, you can get evicted, you can have your house burned down by your neighbor. Owning a house allowed me to plot a lifetime expense versus my retirement savings. Generally I worked backward from 70 which was the point at which I got maximum Social security to what ever was the current present, and then looked at an annualized model of costs from there to the present. Once I had the model I could plot my earliest retirement date backward from 70 as time passed. Sort of like the two trains leave the station, where will they meet. The only reason I bought the house was that my need to live somewhere was a given, and owning removed a host of variables from my model which were hard to predict. Rather than thinking of it as an investment it acted more like a cost shield which meant as my income grew all of the additional growth could go into retirement rather than being allocated to higher housing costs.
- barrkel 11y ago
  Maintenance and repair make owned housing a little bit more unpredictable than you suggest - get unlucky with something like subsidence, and you could be facing dramatic spikes in insurance rates and a much harder time trying to sell should you want to move.
  - uptown 11y ago
    Subsidence? Extremely, extremely low odds of that factoring into the vast majority of properties.
  - ChuckMcM 11y ago
    Actually maintenance and repair can be modelled fairly easily (and as I found out I over modelled it) I used $5/sqft/year as a maintenance cost. That was based on information from Popular Mechanics on home repairs, a reader's digest survey, and a blend of roofing/painting/carpeting divided by 15 years. For my house at 2500 sq feet that comes out to $12,500 (or about $1000/month). Actual costs were closer to $600/month but living in California meant things like winter/summer cycles are not as hard on the house. I analyzed the cost of moving against the cost of renting it out and buying a new place which has its own interesting quirks. My wife's parents did the keep/rent the previous house each time you move thing while my parents simply rented until my Dad retired. In retirement my wife's parents have a built in cash flow that my parents do not. Insurance has been the most variable with California adding earthquake and flood insurance requirements. As a component of cost has varied the most (it isn't included in the $600/month which is just maintenance). On the plus side, with California's no pre-payment penalty I could always use bonus money to pay down the mortgage which both kept its value in the future and mitigated future interest expense. That was always a better net use of cash funds over a savings account. I've always maintained a line of credit on the house which could allow me to "re-access" that value if something unexpected happened. Not for everyone of course but its a different way of looking at home ownership which isn't commonly discussed.
jseliger 11y ago
I could probably save for a down payment, and I even have a kid now, but I have so many reasons why buying a house doesn't matter to me right now. Also, my job is not to feed into the mortgage-finance-housing industrial complex.
datashovel 11y ago
To me the only thing that makes sense when considering buying a house is to buy in cash or make plans to pay down your mortgage as fast as possible. It was eye opening when I did some numbers a while back (can't vouch for whether this is still accurate today, but my hunch is it's not far off). If a person pays minimum monthly payment on a 30-yr mortgage (assuming certain interest rates) you ultimately end up paying approximately the cost of the house in interest over the life of the loan. This may be obvious to some who are more familiar with finance, but I think it's eye opening to the majority of people when they hear this.
- potatolicious 11y ago
  This is technically correct but fails to account for the time value of money. If you took out a $200k loan at 4% you'd end up paying $343k for the entire 30-year mortgage. This seems outrageous, except that $1 in 2045 (when you pay off the loan) is worth substantially less than $1 in 2015. For comparison's sake, consider a 30-year mortgage that is paid of this year, started in 1985 - $1 in 1985 dollars is $2.21 in 2015. Your mortgage payment (assuming you lock it in) do not increase over the life of the mortgage, which means your monthly payments are - in inflation adjusted dollars - dropping over time. In fact, based on an inflation rate of 2%, your mortgage payment of $953/month in 2015 falls to an inflation-adjusted $523 by the time of your last payment, and the total cost of your $200k mortgage is actually closer to $258k (2015 dollars). https://ostermiller.org/calc/mortgage.html https://ostermiller.org/calc/mortgage.html
  - datashovel 11y ago
    I guess it probably also depends on financial well-being of the individual / family, and whether or not they're allergic to paying money for money and paperwork :)
  - datashovel 11y ago
    also I wonder what that $58k would look like if, over the life of the loan they put the equivalent of a mortgage payment into the stock market every month (assuming they're approximately matching returns of S&P500 index every year). EDIT: That is, as a substitute, instead of paying mortgage payment every month you're putting that same amount of money into your investment portfolio.
lewisl9029 11y ago
Another point most people don't consider is the fact that a mortgage is essentially a very heavily leveraged (often 10x+) investment in real estate. Example: Consider a $500k mortgage with a $50k down payment (10x leverage). A 5% drop in value on the $500k home means you've lost 50% of your principle investment (-$25k), and vice versa with gains. Most investors have rather modest risk profiles and would never consider a 10x leveraged investment of any other type, but for some reason they give no second thoughts to putting down money for a 10x leveraged mortgage. I personally would rather pay the fixed monthly expense of a rent rather than exposing myself to the risks of a 10x leveraged investment.

kazinator 11y ago

I suspect that renters magnify the difficulty of getting a property, which psychologically prevents them from seizing the opportunity. You need less money down than you think. The income is the important thing.

toomuchtodo 11y ago
Sort of. Yes, you can get away with a 3% down payment with an FHA loan. But 3% is still $6K on a $200K property, even more if you're trying for a $250K or $300K property. That doesn't include closing costs, nor an emergency fund you need for homeowner expenses that traditionally come up. Sure, you can afford the house at closing. Are you financially well off enough to afford it for the next 15/30 years (depending on loan term) so as to not lose your equity? Probably not, and that's not going to get fixed until incomes start rising.
- kazinator 11y ago
  Counterpoint: the question you're asking has to be asked about renting also! Are you financially well off enough to afford what the rent is going to be over the next 15-30 years? If you aren't well off enough for the mortgage or the rent, then you're fucked either way. Now suppose we equate mortgage with rent, and declare that the payments you're making aren't contributing to equity---they are just pure rent. Then the equity you have in that $200K property is the $6K you put in. That is what is at risk relative to renting. (Of course we are ignoring the effects of location. Relative mortgages versus rents and the longer term picture in a given area and such.)
  - 33a 11y ago
    If the rent gets too high, you can just move. If you lose your job, good luck dealing with that mortgage. The problem with buying a place is you get stuck in one location.
    - jdmichal 11y ago
      So your answer to rising rent is to constantly move to comparatively worse and worse locations? Because if rent's going up, it's going up everywhere. So to get a lower rent, you're talking about downgrading.

geggam 11y ago

One has to stay in a house 5 years to break even on buying it. I am not sure the current employment landscape is conducive to that sort of commitment.

pmorici 11y ago
That's not true. The amount of time you need to stay in a house vs. renting is variable base on a number of factors. Among them are the cost of the house you would buy compared to the cost of rent among other considerations. Google "Rent vs. Buy" and you will find a number of comparison calculators. The one from the NYT is particularly good and tells you how long you need to stay in a particular house to make it better than renting financially speaking. http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html http://www.nytimes.com/interactive/2014/upshot/buy-rent-calc...
craigyk 11y ago
Of course it depends on location and timing, but I sold my last home of 6 years and walked away with 180k. Discounting what we paid in mortgage over that time we probably only netted like 40k or so... but compared to the hassle and cost it would have been to rent a place big enough for two dogs, two cats and two kids I'm probably 300k richer than I would have been renting.

alistproducer2 11y ago

People should really do their homework. Find an online interest calculator and see how much interest you pay over the life of a 30 year loan. Even at these historically low rates it's about double the sticker price. Also look at the amortization schedule. Unless your house appreciates considerably ever year, you will pretty much always sell at a loss when you factor in the interest paid over your time as owner. This is not even including incidental expenses like appliance repair or extra warranties hi might purchase to "protect" you from said incidental costs. In short, from a financial standpoint the math on buying a house with a mortgage never works out in your favor. It's not even close. I am looking at this from a purely mathematical standpoint. I do undere that there are qualitative reasons that owning beats renting; however, I'm sick of hearing people try to make the case that a home is an investment, which is true only if you ignore the interest paid. EDIT: if you did sell early in in the loan you could treat the money lost to interest as an implicit rent. This makes me laugh because you could've just rented in the first place and had the benefit of mobility and avoided the headache of putting a house on the market.

nitrogen 11y ago
Does this take the mortgage writeoff into account? Even if you're effectively paying rent to the bank instead of a landlord, does the writeoff not make up the difference, especially if you sell in the earlier years of the amortization schedule?
- alistproducer2 11y ago
  A write off is worth the amount times your tax rate. This will mitigate the loss but won't come close to eliminating it.
akira2501 11y ago
> Find an online interest calculator and see how much interest you pay over the life of a 30 year loan. Then go to a cost of living calculator to see how much the inflation trend of 30 years minimizes that. The dollars you pay at the start of your loan have much more value than the dollars at the end; it tends to take quite a bit out of the "sticker shock" of just looking at the "total interest paid" column of an amortization schedule.

thrownaway2424 11y ago

Majority of Germans also not saving for down payment. Only America is deranged about home ownership.

peteretep 11y ago
Not only America - Germany and France are the exceptions, not America.

thedz 11y ago

IMO, the biggest thing in being happy with renting vs buying isn't the monetary factor, but in how ready someone is with owning. Owning comes with a lot of advantages: home renovations, settling in and making something your own, building property value over time, a stable monthly mortgage payment, that pride that comes from saying you own something. But it has a lot of other factors to: being responsible for repairs, landscaping, property taxes, less flexibility if you need to relocate. The "renting is throwing your money away" line is prevalent, but is also a gross simplification of the rent vs buy decision.

cinquemb 11y ago
So if one doesn't care about home renovations, building property value over time, that pride that comes from saying you own (but mortgage == owning something fully in x0 years?) something, and wont mind moving if prices change, then it seems like one should stick to renting?