M sent me this blog post by John Wake, an oft-quoted agent in the Phoenix area. As M suspected, I’m going to have to beg to differ with Wake on this one. He stated:
Maybe you harbor this secret thought, “I should have sold my home at the peak. I would have made more money.”
Where would you live?!
If you bought another home at that time, it’s price would have also been at it’s peak, and today you would be in the exact same situation.
Don’t forget that when you buy at the peak of the market your selection of homes stinks. You have to take what you can get. You have to make tons of compromises on the features, location, etc. of the home.
Maybe this thought has flashed across your mind, “I should have sold at the peak, rented and then bought at the bottom.”
Are you nuts!
I did sell at the top of the market in April 2005. Where do I live? I live in a house. Am I nuts? I don’t think so. I made a profit on the sale of my home, then cut my expenses by moving into a rental. It’s worked out rather well.
Wake questions this strategy:
For that strategy to work;
1) You would have to sell at the top of the market.
There is a difference between knowing homes are over-priced and knowing when you are at the top of the market.
I disagree. The median price continued to climb after I sold my house, and I possibly could have sold it for a little more a couple of months later. Maybe not though. It was close enough for me to be happy. Any time a market peaks it’s hard to say on which day it’s going to turn. Smart investors don’t anguish over squeezing the last few dollars out when they make a profit and get out in time.
2) You would have to buy at the bottom of the market.
No you don’t. Let’s say for the sake of argument that the market drops 30%, but a renter doesn’t come off the sidelines and buys when the market recovers 5%. That’s still a nice savings, even if they didn’t catch the bottom of the market. In addition, although there are tax benefits with homeownership, there are savings associated with renting, [No maintenance, repairs or remodeling for example] so you don’t necessarily have to buy at the bottom to justify waiting to buy.
3) Prices would have to fall at least 10%.
When you sell your home, it will cost you perhaps 8% in selling costs - real estate agents, title insurance, escrow fees, etc. Years later when you buy your new home, it will cost you perhaps 2% in buying costs - mortgage costs, title insurance, escrow fees, etc. If you just keep the same home, you wouldn’t have those expenses.
So, between the time you sell and the time you buy, home prices would have to fall 10% for you to break even.
This does not include the cost of moving twice, the disruption to you and your family and the fall in your work productivity during and possibly after the move.
Hey, prices are already off by 10% in Phoenix, and I anticipate further declines- so I’ve got that one covered.
4) You will have to put your life on hold until the market bottoms out.
“I’m sorry honey, I know you want to get married [have children, have more children, stop renting, move to a better neighborhood, move to a better school district, have your mother move in, etc.] and buy a home but I can’t buy a home until I know the market has bottomed out. My sell/rent/buy strategy is more important to me than living my life.”
I don’t see where any of those things would have to go on hold. Mr. Twist and I got married and had our first two children before we bought our first house. Mom lived with us for awhile in one of our rentals. [I lived in Japan at the time- I couldn't have bought a home if I had wanted to.] There are thousands of rentals across the Phoenix metro in virtually every school district. Life goes on in rented houses.
Other disadvantages
It doesn’t make any sense to improve your landlord’s property. If you own the property you can turn it into your dream home.
When you rent, you don’t have the family stability of owning a home. Your lease may not be renewed.
When you own a home, you are in control of how you improve the home and when you choose to move.
It’s true it doesn’t make sense to improve the landlord’s property. I’ve consoled myself by using the money I used to spend on home improvement projects on other things. There’s other things to dream about besides housing.
Thousands of families are being foreclosed on in Phoenix because they can’t afford their home. Granted renters can be forced to move when there landlord’s property is foreclosed on. Owning is no guarantee of stability though.
I disagree that it’s easier for homeowners to choose when to move. It’s tough to sell a home these days- it’s easier to find someone to take over the lease.
The “Property Ladder” Strategy
The traditional, tried and true “property ladder” strategy is far, far, far more successful.
Buy a home as soon as you can swing it, even if it isn’t your dream home.
If home prices appreciate, which is the normal state of affairs, you aren’t priced out of the market for your future dream home because your current home is also appreciating. If you hadn’t bought that first home, you could have been priced out of the market for your dream home.
If home prices fall, which is very unusual, you are no worse off. What you “lose” when selling your current home, you gain back when you buy your new lower priced dream home.
Here’s M’s rather "tongue-in-cheek response to that:
As a renter, I’m sure you feel a great sadness as your life is "on hold". Hopefully someday you and Mr. Twist will buy a home and get back on the "property ladder", who cares if it cost you 300k, at least you’ll have some "stability".
Wouldn’t you and Mr. Twist be feeling more "stable" if you bought this home;
[Current price also includes $7,500 in incentives]
My housing strategy may not work for everyone, but Wake is mistaken if he thinks everyone is better off on the property ladder if they can manage it. Some of us dream of other things besides our "dream home," and are managing to live happy lives and stay off the streets.
Happy renting!
I must be nuts! I sold, too, and I rent now.
The house I sold for $289K in 2004 is listed for $229K. I bet I could scoop it up for $210K tomorrow, if I wanted it back.
Plus, renting, my expenses are $600/mo less. That’s $22K over 3 years.
I got a chuckle out of “Prices would have to fall at least 10%?” Don’t look now… but they already HAVE.
Same here, NVmike!
I’ve owned four homes over the past twenty years, but I’ve also rented for about half of that time as well. I’ve always considered my family’s specific circumstances, with many factors in mind, when making this decision to rent vs. own.
Currently, my wife and I are renting in DC for $1150 per month. The homes that interest us would cost $4000 per month in mortgage and taxes, so we’re saving at least $2000 net of the tax effect. We’re literally putting $2500 into the bank every month.
While waiting on the sidelines this past year, prices have dropped up to 15% depending on the seller, and we predict they will drop another 20% by next summer, without a recession.
The likely result is that we will buy a home a couple of years later than we originally planned, but our purchasing power will be a third greater when we do. Around here, that’s the difference between a run-down place in a marginal neighborhood and a completely updated place in a prime neighborhood.
We’ve also learned alot about ourselves and our true sources of happiness while waiting, and those lessons are worth as much as the money savings. For us happiness is less about material things and more about health, loving well and doing good work.
I truly recommend a combination of renting and owning to anyone who needs to maintain a healthy perspective on life while building a strong financial foundation for it.
DCBeacon-
Thank you for your comment about a “healthy perspective,” because that is what I’ve learned over the past couple of years as well.
It has really been liberating not to put so much money and time into remodeling and redecorating our home. I’ve loved the savings in money and time.
I’ve watched the teary-eyed folks on TV who are being forced to move because they can’t manage their wonky loan. I keep thinking the news crews ought to come back a year later when these folks are in an affordable rental and have discovered the world of disposable income. I suspect most people will ask themselves, “What in the world was I thinking?”
I retired in January of 2006 in Walnut Creek, CA, sold my condo for 500K in March, and moved to San Diego. I never really intended to sell a peak, but that is how it worked out. . .the same condo today sells for $419. . .all of my former neighbors said, “you sold at top, nothing else ever sold that high.” We had intended to rent for a year to see if we liked San Diego. My rent is $2500 a month on a waterfront condo that would cost over 700K even in today’s reduced prices. If you do the math, 700K times 5% (current CD rate) is $35,000 a year - I am paying 30K a year. . .I could easily afford to write my landlord a check for 700K, but with property taxes, Home owners dues ($500 a month) and the loss of 5% on my money (actually my portfolio is getting 6.5%) it would cost me at least $20,000 more a year to buy. . .I would have only property tax deduction if I paid cash. . .needless to say, I am renting until the cost of owning comes down.
Mark-
You’d think it was “needless to say,” but I still have mathematically challenged relations who say, “But you aren’t building any equity!”
Two former neighbors sold their house in August 2005. Reason for the sale: She got a job in another city, so he and she decided to move there, rather than commute from here.
The house sold quickly, they moved to the other city, rented a small cottage, and guess what? She didn’t like her new job!
So, she and her husband made the decision to follow their dream of traveling and working from a motor home. She quit the job, they bought an RV, and now they live and work wherever they are. He’s a web developer and she’s a writer/photographer.
Occasionally, she says that she misses yardwork, but that’s the only homeownership nostalgia I’ve been able to detect.
You’d think it was “needless to say,” but I still have mathematically challenged relations who say, “But you aren’t building any equity!”
My response to that is: “Prices are DROPPING; I’m not LOSING any equity.”
And “owners” aren’t just losing equity on the percentage they actually own… since a house is highly leveraged, they’re losing equity on the full amout, in essence, eating the lender’s loss.
Building equity? LOL. Not in this market.
You go girl. One day they will GIVE you a house. I repeat, one day they will GIVE you a house.
All of you, cut out this blog entry and paste it on your refrigerators.
One day they will GIVE you a house.
I think he forgot the part where you HELOC the property many times over. You know, to gain more equity.
Great post twist, props to M for the source.
A house is a home is a HOME! Mine is paid off. I’m not selling. I’m not renting. And I’m not buying again. A roof over your head will have a whole new meaning in this new millenium. Gamblers wind up in the gutter my dad used to say.
I think 95% of people who hang out here are smart and ahead of the curve. But I do believe sheeple have a tendency to spend the difference between renting and owning instead of investing it…, and in their cases, buying a house i.e. **forced savings** does make sense for them, if they can afford it. It is the only way they will build equity. Some people just can’t put savings ahead of so-called life-style. Are the renters here investing the difference between renting vrs owning?
Home prices falling everywhere.
http://www.marketwatch.com/news/story/record-home-price-declines-all-top/story.aspx?guid=%7BE0F209E8%2DB6B3%2D4352%2D8F24%2DED365FBA216D%7D
Could not believe the Citigroup bailout today. I understand that they can trade stock for cash, but a guaranteed 11% return?, must be preferred stock?
Twist: You’d think it was “needless to say,” but I still have mathematically challenged relations who say, “But you aren’t building any equity!”
Sad isn’t it?
I’ve tried spelling it out for them, line by line — how even if I drop 40-60K in rent over the next few years waiting for the bottom (or something like it), that’s still far less than the money I would spend servicing the *interest* on a house running 100 to 300 thousand more than it is today. Not to mention the extra 30 to 240 K in principal I would have had to pay for the house in the first place. Even pointing out that, if prices drop 300K, then my 25% down payment has dropped 75,000 dollars US.
In the mean time, I don’t have to freak out that the drains need to be cleared and pipes replaced, worry about being over-appraised for this years property taxes, or even that the fruit trees in the back need topping.
The thing that people like to point out is how “rents can be raised” — and then I show them how a lot of those ARM payments are reset. In this neck of the woods a 10% rent increase is “huge” — yet some of those resets are a heckuva lot higher than that.
Or that “you can put holes in the walls” benefit that they keep going on about — unless you’re in a HOA, of course. Suddenly the length and shade of your lawn is your neighbor’s business, and your house color will probably be the approved shade of beige. Remember, you get to pay for this privilege of being fined for forgetting to close your garage door.
I have to admit that I’ve always despised HOA’s — it’s one thing to charge a fee to deal with common area issues (landscaping, security, community center, and so forth), another entirely to create this bizarre legal entity that can foreclose on your house if you dispute a minor fine. My not-so-secret hope is that this mess flushes a lot of the more onerous HOA’s — it was one thing to convince buyer’s to sign hyper-restrictive documents when they were desperate to find ANYTHING they could move into, but now that the market’s popped? But I digress…
BTW, an update on the “bet” with my co-worker — since placing the bet, the Zillow estimate on the house I’m renting has gone from 704K (8/23/07) to it’s current price of 645K (11/2/07). He’s still insisting this is a “temporary slump” in pricing (well, technically that’s correct — even if it’s a decade long downturn, it’s only temporary), going so far as to start looking for investment opportunities.
(shakes head)
Looney, the problem with your thesis is that in the age of the HELOC, there is no forced savings. Someone calls every 15 minutes trying to get you to “unlock your equity” (I get these calls and I don’t even own!), and people do, with nothing more than that phone call and a signature.
Thus, what may have been an advantage over renting in the past (the “forced savings” effect) has all but dissolved, leaving you with paying for equity that is disappearing by the day. Absent a really outstanding deal (e.g., 1999 prices), you’d have to be unbalanced to buy now.
This is my first posting. It’s reassuring to find like-minded, aware individiuals. The points here are well made and thought out. It strikes me, though, that much of what’s happening was predicted and predicable. I sold my 2 LA homes in spring 2006. By summer other houses of similar construction in both neighborhoods were already dropping in price. My strategy was clear at the time and hasn’t changed, I sold at the peak, I’ll rent for a while (Which I predict will no less than 2 years — and that’s optimistic! This will play out for 5 at least, IMO) Then I’ll pick up a home and some investments on the wild profit I made on my home sales. (admittedly, I don’t trust the stock market with its volatility and insider trading and gutted regulation), so a 5% return on money markets on my profits will probably have to do. The numbers crunched here by others for rental costs reflect my own. I’m still way ahead.
For me, it’s a simple philosophy that plays out time and again, what goes up, comes down. And home prices went up way too high. With a little patience, those on this site (and awake) will make a tidy killing in a few short years.
Captain Jack-
Welcome. It’s always good to have another like-minded soul join our cast of characters. In a world that’s willing to pay a huge premium to have a paper that says “deed” on it, it’s always refreshing to me to log on and converse with people who realize that there is more to dream about and invest in than that paper.