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I expected this to be about the wisdom of buying a house in the current US market. It is an interesting article even though it doesn't address that question.

I expected this to be about the wisdom of buying a house in the current US market. It is an interesting article even though it doesn't address that question. But for most people, financially speaking, buying a house at the moment would be a really bad idea. Yes, there's cheap credit, but there is also essentially no chance of significantly appreciating prices for at least the next five years, and a strong chance of prices dropping further as a result of further recession and uncertainty about the legal status of foreclosure procedures.

e40 15y ago
People with children should ignore your advice. 1/4 mile from where I live is another city with horrible schools. People living there will need to send their children to private schools, at about $20k/yr. Where I live, the public schools are top notch. I know several families that moved here and bought a house (there is very little rental available, and it's expensive). A family with 4 children will save about $80k/yr living here. That changes the equation quite a lot.
- tokenadult 15y ago
  People with children should ignore your advice. People with children in any state of the United States that does not yet have public school open enrollment might consider asking their legislators to enact public school open enrollment, which works well in Minnesota, Iowa, and perhaps other states. Public school open enrollment, which has been going on in Minnesota for more than twenty years, gradually encourages public school districts (which are usually local oligopolies who don't have to listen to clients very much) to compete on the basis of quality and flexibility of their programs to gain student enrollment. Public school open enrollment also decouples decisions about where to live from decisions about where to enroll children in school, which is good public policy on several grounds. http://education.state.mn.us/MDE/Academic_Excellence/School_Choice/Public_School_Choice/Open_Enrollment/index.html http://education.state.mn.us/MDE/Academic_Excellence/School_... After edit: In relation to comments in other subthreads here, about the cost of paying a mortgage versus the cost of paying rent, the odd thing about the bubble economy in this town is that mortgage payments got to be MUCH higher, even at low interest rates, than prevailing rents for the same or very similar properties. It has been financially advantageous for a long while in this market to rent rather than buy, and perhaps still is for several years to come. The whole issue is fraught with public policy implications and sometimes very difficult economic assumptions. http://minnesota.publicradio.org/display/web/2011/05/11/housing-market-twin-cities-april/ http://minnesota.publicradio.org/display/web/2011/05/11/hous... http://www.twincitiesrealestateblog.com/ http://www.twincitiesrealestateblog.com/ http://www.usatoday.com/money/economy/housing/2010-08-11-housing11_cv_N.htm http://www.usatoday.com/money/economy/housing/2010-08-11-hou... http://www.boston.com/bostonglobe/ideas/articles/2009/03/22/rethinking_rent/ http://www.boston.com/bostonglobe/ideas/articles/2009/03/22/... http://www.clevelandfed.org/research/commentary/2011/2011-03.cfm http://www.clevelandfed.org/research/commentary/2011/2011-03... http://www.clevelandfed.org/research/commentary/2011/2011-06.cfm http://www.clevelandfed.org/research/commentary/2011/2011-06...
- mapgrep 15y ago
  Are renters suddenly no longer eligible to send their kids to school?? Wow, that's new.
  - e40 15y ago
    I never said anything like that. I said in the place I live, there are few rentals available, so the decision is to buy in my town or live (rent/own) in the other town (with bad schools). My point was, the savings on private schools makes the "should I buy?" question much easier to decide.
    - mapgrep 15y ago
      Ah, I missed the "there is very little rental available." Sorry.
jeffdavis 15y ago
Your analysis leaves out a very important factor: rents. If you don't buy a home, you have to rent. If your mortgage payment is below the going rents (not too difficult to achieve if you factor in the tax write-off), then one way you can look at that is you give an $X down payment now for a free house in 30 years. If you look at it that way, slow growth doesn't look quite so bad -- the house only needs to be worth about $8X the down payment in constant dollars 30 years from now. Assuming 20% down, that's only appreciating 60% in 30 years, which is only assuming about 1.5% growth in home value per year. Inflation should probably also factor into your analysis, for those who believe that inflation is likely in the long term. Buying a home also offers a lot of stability on your long-term housing costs. Even if you buy and sell every few years anyway[1], the fact that you are both buying and selling at the same time leads to a fairly even end result. With renting, you are always purchasing on the spot market[2]. Avoiding risk and having control over when you move both have a value. [1] Of course, buying and selling every few years is very costly, but it doesn't affect the stability argument. [2] And it's not just luck when you happen to be moving around. If you are buying into an area because of a new employer, there's a good chance that the employer is hiring, and that a lot of people want that same apartment.
- byrneseyeview 15y ago
  Since the tax-deductible nature of mortgages also applies to your landlord, that factor nets to zero. Inflation also nets out to zero, since both the borrower and the lender (and the landlord and the renter) are using the same currency. Unless you argue that home buyers are systematically better at accounting for inflation than bankers, of course. The way I would look at it is that I buy housing the way I buy groceries, clothes, and pretty much everything else: I buy it when I need it. I mean, sure, if I bought an orchard I could get apples for "Free" after I'd paid the mortgage, but that's just bad accounting. The problem with buying a house is that it's a massive bet on your local labor market. Your job (your biggest asset, in terms of net present value), is also a bet on the same market. You're levering up massively in order to bet on one of the biggest un-controllable risks you face, and you're paying 7% transaction costs on the purchase and the sale in order to do so. A cheaper way to make this bet is to borrow several times your annual income, and bet on your being laid off (i.e. you make money if you don't get fired, and you do make money if you do get fired). That would be a terrible decision.
knowledgesale 15y ago
I would love to agree with you as your arguments seem reasonable and it seems you know the subject well. The only problem is that I have been hearing the very same claims for almost 20 years by now.
- Estragon 15y ago
  ...I have been hearing the very same claims for almost 20 years by now. Not sure where you're coming from with this.. Five years ago, the received wisdom was that you should buy now to avoid being priced out of the market.
ww520 15y ago
One strong leading indicator of house price is rent. When rent is increasing, house price is 1.5 to 2 years away from appreciation. This is because increasing rent means the vacancy in a market is going down, more people coming into the area. Higher rent will push some people to start buying houses. Both factors force house price higher in the near future.
- Estragon 15y ago
  If you have any pointers to evidence that rents are increasing in the US, and of a historical positive correlation between rental prices and house prices, that would be very interesting.
  - ww520 15y ago
    Real estate markets tend to be local markets; it's kind of difficult to do prediction on the whole U.S. market. The local real estate companies or rental agencies should have current rent and historical rent level for local markets. For me, I just go to Craigslist and do some quick search to get a gut feeling. Consistent rent increase is a very important indicator because it means couple things: - More people are moving into an area, due to new jobs, more economic activities, etc. - It's easier to rent than to buy so people moving into an area would rent first. Buying takes more commitment so it lags. Rent is a leading indicator of buying. - As more and more people move in, housing supply can't keep up. Vacancy goes down. 5% is kind of the frictional vacancy barrier. At below 5%, rental market is white hot. Rent would creep up slowly first and then faster. - The rent vs buy debate would tilt to the buy side. - With more people in an area, lower vacancy, and ever increasing rent, more people will favor buying. - House price goes up as a result. In the last cycle in the SF Bay Area, rent had noticeable increase starting around 95 and 96. House price started going up around 98 after being flat since 89. Rent became white hot around 2000 and 2001. Then crashed at the dotcom bust. But house price kept going up abnormally because of Fed's low interest rate policy until the 2005/2006 bust.

e40 15y ago

People with children should ignore your advice. 1/4 mile from where I live is another city with horrible schools. People living there will need to send their children to private schools, at about $20k/yr. Where I live, the public schools are top notch. I know several families that moved here and bought a house (there is very little rental available, and it's expensive). A family with 4 children will save about $80k/yr living here. That changes the equation quite a lot.

tokenadult 15y ago
People with children should ignore your advice. People with children in any state of the United States that does not yet have public school open enrollment might consider asking their legislators to enact public school open enrollment, which works well in Minnesota, Iowa, and perhaps other states. Public school open enrollment, which has been going on in Minnesota for more than twenty years, gradually encourages public school districts (which are usually local oligopolies who don't have to listen to clients very much) to compete on the basis of quality and flexibility of their programs to gain student enrollment. Public school open enrollment also decouples decisions about where to live from decisions about where to enroll children in school, which is good public policy on several grounds. http://education.state.mn.us/MDE/Academic_Excellence/School_Choice/Public_School_Choice/Open_Enrollment/index.html http://education.state.mn.us/MDE/Academic_Excellence/School_... After edit: In relation to comments in other subthreads here, about the cost of paying a mortgage versus the cost of paying rent, the odd thing about the bubble economy in this town is that mortgage payments got to be MUCH higher, even at low interest rates, than prevailing rents for the same or very similar properties. It has been financially advantageous for a long while in this market to rent rather than buy, and perhaps still is for several years to come. The whole issue is fraught with public policy implications and sometimes very difficult economic assumptions. http://minnesota.publicradio.org/display/web/2011/05/11/housing-market-twin-cities-april/ http://minnesota.publicradio.org/display/web/2011/05/11/hous... http://www.twincitiesrealestateblog.com/ http://www.twincitiesrealestateblog.com/ http://www.usatoday.com/money/economy/housing/2010-08-11-housing11_cv_N.htm http://www.usatoday.com/money/economy/housing/2010-08-11-hou... http://www.boston.com/bostonglobe/ideas/articles/2009/03/22/rethinking_rent/ http://www.boston.com/bostonglobe/ideas/articles/2009/03/22/... http://www.clevelandfed.org/research/commentary/2011/2011-03.cfm http://www.clevelandfed.org/research/commentary/2011/2011-03... http://www.clevelandfed.org/research/commentary/2011/2011-06.cfm http://www.clevelandfed.org/research/commentary/2011/2011-06...
mapgrep 15y ago
Are renters suddenly no longer eligible to send their kids to school?? Wow, that's new.
- e40 15y ago
  I never said anything like that. I said in the place I live, there are few rentals available, so the decision is to buy in my town or live (rent/own) in the other town (with bad schools). My point was, the savings on private schools makes the "should I buy?" question much easier to decide.
  - mapgrep 15y ago
    Ah, I missed the "there is very little rental available." Sorry.

jeffdavis 15y ago

Your analysis leaves out a very important factor: rents. If you don't buy a home, you have to rent. If your mortgage payment is below the going rents (not too difficult to achieve if you factor in the tax write-off), then one way you can look at that is you give an $X down payment now for a free house in 30 years. If you look at it that way, slow growth doesn't look quite so bad -- the house only needs to be worth about $8X the down payment in constant dollars 30 years from now. Assuming 20% down, that's only appreciating 60% in 30 years, which is only assuming about 1.5% growth in home value per year. Inflation should probably also factor into your analysis, for those who believe that inflation is likely in the long term. Buying a home also offers a lot of stability on your long-term housing costs. Even if you buy and sell every few years anyway[1], the fact that you are both buying and selling at the same time leads to a fairly even end result. With renting, you are always purchasing on the spot market[2]. Avoiding risk and having control over when you move both have a value. [1] Of course, buying and selling every few years is very costly, but it doesn't affect the stability argument. [2] And it's not just luck when you happen to be moving around. If you are buying into an area because of a new employer, there's a good chance that the employer is hiring, and that a lot of people want that same apartment.

byrneseyeview 15y ago
Since the tax-deductible nature of mortgages also applies to your landlord, that factor nets to zero. Inflation also nets out to zero, since both the borrower and the lender (and the landlord and the renter) are using the same currency. Unless you argue that home buyers are systematically better at accounting for inflation than bankers, of course. The way I would look at it is that I buy housing the way I buy groceries, clothes, and pretty much everything else: I buy it when I need it. I mean, sure, if I bought an orchard I could get apples for "Free" after I'd paid the mortgage, but that's just bad accounting. The problem with buying a house is that it's a massive bet on your local labor market. Your job (your biggest asset, in terms of net present value), is also a bet on the same market. You're levering up massively in order to bet on one of the biggest un-controllable risks you face, and you're paying 7% transaction costs on the purchase and the sale in order to do so. A cheaper way to make this bet is to borrow several times your annual income, and bet on your being laid off (i.e. you make money if you don't get fired, and you do make money if you do get fired). That would be a terrible decision.

knowledgesale 15y ago

I would love to agree with you as your arguments seem reasonable and it seems you know the subject well. The only problem is that I have been hearing the very same claims for almost 20 years by now.

Estragon 15y ago
...I have been hearing the very same claims for almost 20 years by now. Not sure where you're coming from with this.. Five years ago, the received wisdom was that you should buy now to avoid being priced out of the market.

ww520 15y ago

One strong leading indicator of house price is rent. When rent is increasing, house price is 1.5 to 2 years away from appreciation. This is because increasing rent means the vacancy in a market is going down, more people coming into the area. Higher rent will push some people to start buying houses. Both factors force house price higher in the near future.

Estragon 15y ago
If you have any pointers to evidence that rents are increasing in the US, and of a historical positive correlation between rental prices and house prices, that would be very interesting.
- ww520 15y ago
  Real estate markets tend to be local markets; it's kind of difficult to do prediction on the whole U.S. market. The local real estate companies or rental agencies should have current rent and historical rent level for local markets. For me, I just go to Craigslist and do some quick search to get a gut feeling. Consistent rent increase is a very important indicator because it means couple things: - More people are moving into an area, due to new jobs, more economic activities, etc. - It's easier to rent than to buy so people moving into an area would rent first. Buying takes more commitment so it lags. Rent is a leading indicator of buying. - As more and more people move in, housing supply can't keep up. Vacancy goes down. 5% is kind of the frictional vacancy barrier. At below 5%, rental market is white hot. Rent would creep up slowly first and then faster. - The rent vs buy debate would tilt to the buy side. - With more people in an area, lower vacancy, and ever increasing rent, more people will favor buying. - House price goes up as a result. In the last cycle in the SF Bay Area, rent had noticeable increase starting around 95 and 96. House price started going up around 98 after being flat since 89. Rent became white hot around 2000 and 2001. Then crashed at the dotcom bust. But house price kept going up abnormally because of Fed's low interest rate policy until the 2005/2006 bust.