Scales to finally tip from renting to owning?

I play this little game where I read the heading for the BostonRealEstate posts and I try to guess whether its a "Rona" or a "Scott." I'm getting pretty good . . . This one wasn't even close--definitely a "Scott." No offense, Scott, but other than your posts about your fixxer-upper, most every thread you start sounds overly, evenly suspiciously, optimistic about the housing market.
I haven't read that whole analysis yet but I'm going to go out on a limb and say that Boston is NOT one of those 45 metro areas where this shift is occurring.

You have to live in a home for 5 years or more to even break even with renting, so there isn't really much benefit of buying a place if you're just going to move out again once you've got kids. If you're not going to be having kids (like me), then maybe that "starter home" doesn't need to just be a starter.

Given the size of the current US population, I'm doubtful that shifting baby boomers are really going to have a meaningful effect on the overall housing market. I think the "baby boomers are coming" mantra could be a factor in sparking the speculative market in Florida.

In support of my prior comment about the limited effect of baby boomers, take a look at the US Census estimates (Table 1):

http://www.census.gov/population/www/socdemo/age/age_sex_2008.html

I agree with the financial planners. Don't even think of buying right now. There are plenty of people stuck in starter homes already. Find one you like and offer to rent the place for a few years while the current occupants move up to something larger. It's a win-win.

"That said, jumping into the housing market right now is a risk as well given the probability that prices will just keep on falling, albeit maybe at a slower rate."

You know, as opposed to a few years ago, when jumping in was perfectly sensible, because prices were just going to keep rising. This is exactly like thinking it's going to be sunny tomorrow because it was sunny today. Please stop trying to predict the future based on short-term trends.

Renting is still the way to go, why buy an illiquid, leveraged, over-supplied, high-maintenance, high transaction cost "asset" in a declining market?

One really attractive thing about buying today is the low interest rates. If you can lock in a low rate for the next 20 years, it may be financially sound to buy before the market bottoms out. Of course, the flip side to this argument is that when rates rise, that forces down the market price, since homebuyers are generally more constrained by total monthly cost than by absolute price. If you plan on moving in a few years, though, then you give up that locked-in rate, so it's not as worthwhile to buy right now.

Also, one thing the article points out is that the $8k the government gives you can tip the scales in favor of buying. I have a friend who just bought a condo in phoenix for $140k. The first time home buyer tax credit will pay her mortgage for the first 13 months! In a market like boston, that $8k doesn't go nearly as far. (Also, boston's got a pretty high cost of living and a pretty high median income, so a lot of people who could afford to buy a place don't get the full $8k because their income is too high. Not saying that people making $75k+ have my sympathy, just saying the $8k isn't an automatic in the Boston market.)

Consider this: The Fed is still manipulating the mortgage market, holding rates at historical lows, and it is unlikely to continue to do this over the long term. (Could it even afford to?) Once mortgage rates return to free market values (i.e., higher), the housing prices that would mark a break even point compared to renting will necessarily be lower, possibly much lower. In other words, if you buy now you should fully expect the resale value of your house to fall substantially, even if the trade off between buying and renting stays at break even.

Equally importantly, the price declines have not be uniform across all neighborhoods. It is the lower priced neighborhoods where affordability (relatively speaking) has returned. I very seriously doubt that the tipping point from renting to buying has been reached in places like Newton.

Given that renting is still cheaper than owning by those numbers, and the only reason to pay more is because prices are going up, given that prices are going down, why would you buy?

It will be time to buy again one day. But why catch a falling knife?

Yea, owning a house is a terrible investment. Why own a home when you can rent somebody elses house that isnt maintained? I also dont have pets, because they cost money. I make money to save it, not to spend it. I also chose to not have a wife or kids because they also cost money. Saving is everything. Life is good with so much money saved, but I do miss weaing shoes. Well, Im done typing here. I gotta go take the clothes to the lake and wash em up, eat a sandwich that I found, and then stoke up the fire in my cave.

Yea, owning a house is a terrible investment. Why own a home when you can rent somebody elses house that isnt maintained? I also dont have pets, because they cost money. I make money to save it, not to spend it. I also chose to not have a wife or kids because they also cost money. Saving is everything. Life is good with so much money saved, but I do miss wearing shoes. Well, Im done typing here. I gotta go take the clothes to the lake and wash em up, eat a sandwich that I found, and then stoke up the fire in my cave.

Yes, Lance many of those stuck in starter homes are friends of mine. Like many, they had grand ideas back in 2002-2005 of buying a place and selling it in 5 years for 50% more than they paid. That grand idea has been squashed in a big way. Many could well be stuck in their current home for the next 10+ years, unless they want to entertain the very real possibility that the home will sell for less than they paid for it.

What is missing from most of the arguments is that there is also the financial aspect of living in a house. The housing stock of what you can rent in, say, Newton, is very different from what you can buy. The buy vs. rent calculations always assumes that the quality is constant across observations. The simplistic assumption that a property owner would be indifferent between selling vs. leasing out a property is just not applicable in the real world.

HappySaver, your argument is incorrect because it uses the false dichotomy fallacy (Google it). This is hardly a choice between buying a house and living your entire life like a miser. Buying a house is the largest purchase of your life, will take three decades of your life to pay off, and can easily lead to financial ruin if done improperly - see the foreclosure stats for the last several years. There is no comparison between a purchase of this magnitude and spending on things like pets or shoes.

The writers to this blog are heavily weighted against the non-financial atributes of buying. I have not mapped the location of rental units in various suburbs, but I agree with KMC. You limit your choice of living locations when you rent. You are also at the mercy of the landlord who can decline to renew your lease forcing you to move; dealing with this is a chore. And finding a new equivalent rental unit with a good landlord is a chore. And reaclimating to new neighbors with each move is a chore. And if you have a family, moving is stressful to the children. And I lost, broke or misplaced things with every move that I have made. And it takes time and effort to pack - catalog - move everything. And, if a financial motive is needed, hiring a mover to move a household is not cheap. These aggravations have a price and should be factored into the $$ equation.

The standard deduction for a married couple in 2009 is $11,400.
For mortgage payment to have any tax benefit, their itemized deductions need to exceed that number.

In the first example, Aaron and his wife will have mortgage payments of $9120. Until he is over 11,400 in itemized expenses he gets no tax benefit of mortgage interest or real estate taxes..

There is a 50/50 chance (divorce probability) you will lose the house you buy when you get divorced and the "wife" gets everything. Men, stay away from house buying.

David - You are right, owning a house and using one's money to make their own little place in the world is a terrible investment. Some people earn money to buy a home, and rennovate it and decorate it because its makes them happy and because life is short and btw what is money for? But I disagree - money is for saving, not spending. Its best to live in a metal shipping container. And dont even decorate it, because that takes time.. and time is money and money can be saved. Some people buy or paint art, women wear makeup, some people even listen to music - all silly things because they take time and money, and money is for saving not spending. In fact, Im not even sure why I am wasting my time here talking to you, because I could be earning money now that I can save in my cave. BTW David, any dandelions in the yard of your rental? Im looking to dress up some roadkill I found yesterday, and it could use some bitter overtones.

John G,
You must not item your deductions, because if you did, you'd realize that your state income tax payments are deductible. For many people, that takes up a significant chunk (if not all) of the $11,400 standard deduction.
So if you're a married couple making about $120k, you probably pay about $5-6k in state income tax. So you start benefiting at $11,400 - $5,000 or $6,400.
While I agree that one should not overstate the benefits of the mortgage interest deduction (as many are prone to), one also should not understate those benefits either.

While
Whi

John G,
You must not item your deductions, because if you did, you'd realize that your state income tax payments are deductible. For many people, that takes up a significant chunk (if not all) of the $11,400 standard deduction.
So if you're a married couple making about $120k, you probably pay about $5-6k in state income tax. So you start benefiting at $11,400 - $5,000 or $6,400.
While I agree that one should not overstate the benefits of the mortgage interest deduction (as many are prone to), one also should not understate those benefits either.

While
Whi

One question & point to keep in mind:

Point: Many of the places where rent vs. buy is looking good ALREADY went thru deep price reductions, due to the Sub-Prime mess.

Question: Has Boston gone thru the SAME price reductions yet, or is that still to come once the (higher income) Alt-A/Option ARM loans that many in the Boston area took out come due in the next few years?

And the answer is.....................

I'm pretty sure HappySaver was pulling a "Modest Proposal" on us.

I agree with others that the decision to buy a home is based on a lot of things other than financial sense. Hopefully, it includes that in the calculation, but people are driven to become home owners for other reasons. The illusion of control (after all, the bank really owns the house for a long time) is one. Also to be able to choose the colors on the walls or whether a wall stays or goes. To have a garden or a dog or play music loud without someone pounding on the ceiling/floor. Sure, you could find a rental that would give you some/all of those ... but you will probably pay a premium. And the landlord can change his/her mind. (Aside: This doesn't explain why people buy into residences with a restrictive HOA ... they seem to include all the disadvantages of renting without any of the advantages of buying. That seems nuts to me, just to avoid a little snow shoveling/lawn mowing.)

So, some people will be tempted to buy well before it makes perfect sense from an investment point of view. That doesn't make them wrong. They're just using a different measure of value.

Hey KMC, do a search on craigslist for Newton & house and you will find at least a half dozen single family homes for rent. And that is only today, if you were gonig to buy a house you might look for 4-6 months, to say that you could not find a comparable rental in that time is fullish.

Also, since you will not have a mortgage if you find that you don't like the home after a year or two it will be very easy for you to move not having a mortgage. Bulls, please do some research before you post ono here, makes you look foolish.

"Buying a house is the largest purchase of your life, will take three decades of your life to pay off, and can easily lead to financial ruin if done improperly"

Yeah sure, but so is marriage and kids. "If done improperly," a wife and kids could mean a complete financial and emotional ruin. I think it is better rent a wife than buy it outright.

sherbcme:

"do a search on craigslist for Newton & house and you will find at least a half dozen single family homes for rent."

Half a dozen = 6.

How many single family are there listed for sale in Newton at any single point in time? 100+?

I am not sure how the 4-6 months time frame is relevant here, since we are talking about the inventory at a single point in time. In 4-6 months there will also be a lot more houses listed for sale.

I agree with you that having a mortgage is a significant FINANCIAL concern. Obviously, financial concerns are one of the biggest considerations in purchasing a house. But that is not the purpose of my post.

Also, I am not bullish on the housing market at all. For every single factor that points to a rally, I can list five reasons that point to further deterioration of housing prices . However, again, that is not the purpose of my post.

Finally, I do not see why taking non-financial reasons into consideration makes someone "fullish" or "foolish".

Got kids? Concerned about their education? Worried that they might fall into bad company? Maybe you should be thinking about settling down and giving those kids of yours a fighting chance in the world they'll be living in. All too often the debate about renting versus owning puts money ahead of education. The most important issue facing renters is not money, it's your kids' future. If you're not concerned about their future I can show you several apartment buildings in Billerica and Mattapan that might interest you.

why do people think that rent will be cheaper than mortgage in decent towns? Sure if you're single or a couple, a 2 bdroom apt is always cheaper than a house payment and it doesn't matter if the shcool is good as long as it's convienient. But if you want decent schools, let me know where

My husband and I just purchased a house about 4 blocks from where we've been renting (within Boston city limits). In addition to having an additional (covered) parking space and more square feet, we will be paying ~$100 less per month than if we are renting - and that includes insurance and real estate taxes. We're only about a block from public transportation and great outdoor space.

Food for thought....

I think that most people are missing the point of owning. That once it is paid off the only thing to pay is real estate taxes, which after thirty years will be reduced since most of us will be eligible for senior citizen exemptions and the occasional maintenance job. However, the brilliant renter will still be moving around like a pack rat working him/herself to the bone to pay off the next landlord's mortgage. A house is not a car, it must be viewed as a long term appreciating investment. Therefore, if you buy today and your home does not appreciate in the next 30 years, then chances are armaggedon has occurred and it doesn't matter anyway.