Five reasons why buying a house is still a smart move
Filed under: Family Money, Real Estate
I was 21 and a know-it-all. "What would I do with it?" I asked him, rolling my eyes. "I don't want to own anything," I said firmly.
Last year, I drove past the place. The units were selling for about a $1 million - even after the real estate downturn. I said a little prayer to God and my dad, who I'm sure is up there close by, asking for forgiveness for being so stupid and letting an amazing opportunity pass me by.
Although the seemingly endless run of bad housing news is discouraging some potential home buyers, the truth is that the advantages of home ownership have not disappeared. They still include the likelihood that as the population rises, real estate in attractive locations will increase in value.
These numbers are the historical percentage of increase in home values. They are derived from Yale economist Robert J. Shiller's Irrational Exuberance:
1890's - 0.53%
1900's - 1.40%
1910's - 3.30%
1920's - (-0.70%)
1930's - (-0.45%)
1940's - 8.16%
1950's - 2.67%
1960's - 2.57%
1970's - 8.12%
1980's - 5.86%
1990's - 2.84%
2000's - 9.27%
Even if you think the future will be different, buying is still a great way to go. The best things about owning a home have a lot more to do with personal comfort and satisfaction than profit. A story in the New York Times emphasized that. Making a windfall from their purchases was the last thing on the minds of home buyers they talked to.
Here are five reasons why owning your own home can make your life better.
- You are your own landlord. If you want to paint the walls pink and green, feel free. There are no penalties for hanging pictures. You decide when it is time to move.
- Paying the principal is forced savings. Those who say renting is a better deal always point to the opportunity to take what you don't spend on the house and put it in a savings account. How many people actually do that?
- Fixed-rate mortgages never rise – and eventually you pay them off. With mortgage rates at record lows, people who buy now are locking in terrific bargains.
- Good schools. The best school systems are supported by owner-occupants who are willing to pay substantial taxes. These same people are involved in the schools and push to make sure their kids get the very best education.
- Spacious properties in pleasant neighborhoods. Sure, you can find a four-bedroom rental, but they aren't a dime a dozen. Family-sized homes in attractive communities are almost always owner-occupied -- not rentals.
Bob Riha Jr., Procter & Gamble | AP
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Reader Comments (Page 1 of 1)
9-01-2010 @ 10:48AM
dmm219 said...
Most of these are total BS which have already been completely discredited many times before.
1. False. Most landlords care little if you "paint the walls" in their property. That is painting THEY don't have to do later. As a renter, I have never been denied doing any kind of changes to my house...whether its inside the house or outside (landscaping).
2. I do. And I am WAY better off than everyone else my age who bought a house. Period.
3. Neglects PRICE. Low mortgage rates mean little when one cannot afford the PRICE of the home. Prices must fall FIRST before you can tout interest rates. A mortgage is still a 30 year financial prison term...regardless of how real estate shills spin it.
4. Completely false. There are many rentals available in all neighborhoods. Even better, if your neighborhood and school goes downhill in the time you buy to the time you kids graduate (that can be 20-30 YEARS...a VERY high probability), you can easily and simply move to better schools and neighborhoods.
5. Again, just look on rental sites...there are NO shortages of nice, spacious rentals out there...this is not supported by data or facts.
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9-01-2010 @ 11:21AM
David said...
Are you 100% positive on #2?
What about the people your age who bought a 4-family, live in 1 unit and have the other 3 units earning them money over the cost of the mortgage, taxes and utilities?
There, of course, are extra responsibilities, but not paying an additional $550 a month is rent, and banking the extra to big good a deal to pass up for the 5 hours or so a month of actual work involved (mowing the grass, occassionally having to fix/replace something, show an apartment when a tenant moves out).
9-01-2010 @ 11:30AM
aj_otter said...
And also, there ARE shorter terms available besides 30-year mortgages, just FYI.
9-01-2010 @ 11:40AM
ajax said...
You were probably broke at the last Real Estate opportunity, are broke now and will be when the next opportunity arrives (now).
You have no pension and Social Security will not be around when you get to be 75. All those brown and black people in the majority of the workforce and electorate in a few years, are not going to want to support old white people.
You probably have little or no savings.
Our soon to be third world nation will consist of small pockets of the "haves" who own the real estate and the majority "have nots" who rent or live in cardboard boxes.
Only doom is ahead.
9-01-2010 @ 12:43PM
Jeff said...
This is short sighted nonsense.
1) Ok you're right you can paint. But what about anything else? If you do any major modification, you're adding value to somebody else's investment. Therefore you're less inclined and will most likely just live with what you have. If you're ok with this, that's cool, but it is still reality. I find that fixing up my house fun while at the same time adding long term value.
2) This is short sighted. Yes if you're young, you'll have more disposable income right now than those who buy. But what about 20 years from now? Your comment comes straight out of the instant gratification culture. BTW - don't ask me to help pay your rent when you're 80 and SS is bankrupt.
3) You miss the point. Price goes down in the long term as inflation eats away at your mortgage. Low interest rates help this. Historical increases in home value help as well. But you're you're kinda right on this one, if you can't afford, and aren't willing to adjust your lifestyle to do so, then please don't buy.
4) Another short sighted comment - as a neighborhood acquires more renters, school quality goes down. This is just fact. Yes you can buck the trend by one of a few, but if people took your advice, you wouldn't be one of a few.
5) Your options a defiantly more limited when you rent.
9-01-2010 @ 11:28AM
rudytudy said...
@ dmm219...
That's true, except that it's not.
1. There are still many more modifications other than painting that a landlord would never accept. Most renters do not paint simply because it is a wasted cost that will not net them any value since they do not own the property. If you do, then its wasted money which goes against your argument for No. 2. Most landlords would never let you change something like the floors or redo the kitchen. Of course, why would you, its an expensive upgrade for something you don't own and would have to pay more for in moving to an upgraded house someone else owns.
2. Actually, thats really good. Saving is always helpful. But if you live in your house for the rest of your life, then buying is still better. Even with a 30 year mortgage, once it is paid off (we have 15 year) you no longer are paying for that, while with rent you will always pay. Say you retire, not having a mortgage would go a long way with the reduced income. Even if your mortgage was $500 more a month than rent for 15 years is $90,000. Renting after that 15 year mortgage for another 40 years at a conservative $1200 a month (making the cost of mortgage over rent value, $1700 vs. $1200 some 41% which would never happen) would total the additional renting time value at $576,000. Even with the compounding interest saving on the $90k you saved in the first 15 years would not equal the near $600k you are shelling out in rent later in life.
3. Prices are still really good right now. This argument also does not take into account the fact that prices will eventually go up similar to inflation. As inflation rises, debt is good since the value of the debt you owe is now less. While you consider the 30 or 15 years mortgage a prison term, consider the cost of renting after these years in rent the concept that you are simply delaying your prison sentence. :)
4. You have got this one right. There are many good rentals in many areas. But, you will pay a higher rent to be in an area with good schools, so you wont be without that additional cost either.
5. There are some good rentals, but they are sometimes difficult to find. It is tougher to find rentals over $2000 or $3000 a month versus ones that are $1000 a month. Most large homes are owner occupied and many HOAs wont allow the number of rentals in a neighborhood or sub-division to be above a certain percentage of the total number of homes, usually 10%. So there are more homes that you can buy in this range of homes versus being able to rent.
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9-01-2010 @ 12:14PM
Andrew said...
How about Tax savings, deducting mortgage interest, property taxes and if you run a home business deducting part of the mortgage and any maintenance. Those should all be factored in. Of course some states allow you to deduct some of the rental payments, but it is very limited.
How about the fact that rent ALWAYS goes up. My wife and I rented our first apartment out of college and paid $1,100 for a two bedroom apartment. The next year they wanted $1,400. So we moved to a smaller 2 bedroom apartment in a less nice area for about $1,000. What happens if you have to move so far away from work to be able to afford an apartment you are willing to live in? With a home you are locking in the payment. Of course property taxes can go up, but I have never seen them go up in pace with rental increases.
In regards to painting and maintenance, I think something that is being glossed over is the noise issue with renting. We were always hearing loud yelling, banging, screaming kids, and at night we always had to make sure we were quiet to be respectful. We had neighbors under us that smoked outside on their porch, well the smoke came into our apartment if our windows were open. In our house, no such issues, and we can be as loud as we want to be, which makes it easier now since we have kids, which are naturally noisy.
As far as size, I would have to agree that it is very difficult to find a large apartment that is comparable to just owning. We couldn't find a large apartment that was nice, most were dumps. Most apartments are 2 bedrooms with the occasional 3 bedrooms, and I haven't seen an apartment that was affordable when we rented that had 2 or more baths.
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9-01-2010 @ 1:54PM
Jeff said...
"Tax savings, deducting mortgage interest, property taxes and if you run a home business deducting part of the mortgage and any maintenance. Those should all be factored in. Of course some states allow you to deduct some of the rental payments, but it is very limited."
If you're paying enough in mortgage interest and property taxes to claim more than the standard deduction then you're probably paying too much. Home businesses can deduct rent for federal taxes, which are going to be the lion's share of your income taxes regardless of state, so there's really no difference there. Maintenance is a part of your rent, so that's included in your home office deduction in a rental as well.
9-01-2010 @ 12:43PM
bb88 said...
All are true; I am the landlord of three rental property. Tenants need my permission to paint the house. If no, I will charge them a fee to paint back to the original color when they move. All expense and interest on the rental are tax deductable. When my children are ready to go to college, I will get an equity loan to pay for their tuition. When I ready to retire, I will cash them out. Now it is a lot of work to maintenance the rental. In a long run, it worthwhile. We have own them for almost ten year, in a very desirable knighthood in San Francisco. We already tasted the sweet equity. Every time, we pass by the house, the tenants are at work and working hard to pay for our mortgage.
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9-01-2010 @ 1:55PM
Jeff said...
I'm hoping to be where you are soon! Some people are savers and will continue to make money. Everyone else will be renting and living paycheck to paycheck for the rest of their lives. It's sad, but you can't change people.
9-01-2010 @ 1:15PM
roberto said...
you could have made those same 5 points in 2006, in Phoenix, Vegas, Miami, LA, etc. In fact, many people did, and bought on this sort of advice...
They lost 50%, and are the same people who are going into foreclosure in droves today!
So, you didn't even think to test your buying advice against the biggest crash in history? MY you are really really stupid!
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9-01-2010 @ 1:38PM
Maine said...
Your comment shows whats wrong with this country, a lack of taking responsibility. The mortgage companies didn't hold guns to peoples heads making them take out irresponsible ARMs or interest only mortgages. They didn't make people become flippers after the almighty dollar and quick profit. People got greedy, either they wanted a large house they couldn't afford and thus squeezed into it with some exotic mortgage or they wanted to make quick cash with a flip. Well, it didn't work. For those that did, please take responsiblility for your mistake and learn from it. For those that bought a home and are still living in it, enjoy the benefits of owning.
Let me ask you a question, if you lose 50% of the value of your home, does it not make it your home, reaping all the benefits of home ownership? I am just curious. It shouldn't unless you bought that home as an investment, in that case, you probably shouldn't have bought the home in the first place. And if you do lose it because you couldn't afford it or you thought you could flip it and couldn't and thus couldn't afford it, whose fault is that?
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9-01-2010 @ 1:45PM
Jazzy said...
I think somebody is trying really hard to make the real estate market go up.
I own a house and I am throwing $1500/month in trash for interest+property taxes and home insurance. This is after taking into account mortgage interest deduction and deduction you get for property taxes. On top of the I am loosing the equity in my home every day.
Yes I love upgrading little things in my own home but other than that it does not make any financial sense to buy one.
Buying a house is a hobby now :-), an expensive one though.
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9-01-2010 @ 2:01PM
Maine said...
How about throwing almost $2,000 away? That is about what we would be throwing away if we rented a similar sized rental to our current home, compared to about $1,100 a month that we are currently "throwing away". Remember, that amount you are "throwing away" on interest will decrease as the principle payment increases each month. That is how amortization works (unless you made a poor choice and got an interest only or ARM where you will probably be paying more each year). On the other hand, that $2,000 in rent would increase each year. In about 5 years our "throwing away" amount will be under $1,000. What would rent be in 5 years? Probably more than the current $2,000 right? Do the same in 10 years, 15 years, etc... By the time 20 years rolls around, if you are lucky enough to still be living in the same home, that mortgage payment will seem like such a small amount of your living expense. Owning a home shouldn't be looked at as an investment, but if it is, it would need to be looked at as a longer term investment, at the very least 5 years and probably closer to 10 or more.
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