For what it's worth, I didn't mean to sound like I was jumping on you about being able to have more money by buying a house.

It generally means a tighter budget, but at least you get to keep the worth of much of what you spend on it.

Most people I know (I'd say over 95%) fudge on tips at least a bit.

With the story about the friend who lost his house, I have a better understanding for your position on smaller government.

Texas makes up for the lack of state income tax with the abundance of big hair.

-brendan

Texas makes up for the lack of state income tax with the abundance of big hair.

California makes up for its high state income tax with the abundance of big boobs.

Too bad the housing prices here in LA are astronomical. A small, one bedroom "fixer-upper" is about $350K.

I understand that which is why I want smaller government.

Yet earlier you suggested you'd vote for Bush, implying you want it only in a vague abstract sense.

I keep hearing I can deduct things pruchased for work and mileage but I the tax system is so ungodly complicated I don't think anyone really understands it and I am afraid if I do something wrong I won't find out about it for ten years and will be expected to pay loan shark like interest.

Well, if you think you could save something, maybe a tax preparer could help.

I'm in Minnesota I think the prices for the houses here are over inflated because I look at the same type of house in other states an they are cheaper.

If you think so you could move. Of course, you'll offer some excuse, and so I'll just start now by reminding you that some of the price is location. Cheaper elsewhere, that's the tradeoff, if you can't make the tradeoff, it's not actually cheaper.

I also keep thinking about moving to another state that has no state income tax (like Texas they just need to change the weather ) but i'm sure they make up for it with something else.

Sales tax, or use tax. The money has to come from somewhere.

I voted for him the first time and he turned out to be a big spender but i'm sure John Kerry wouldn't be any better in that respect. So I should vote for the libertarian canidate but that's like a vote for Ralph Nader.

Only way to know if John Kerry will turn out any better is to oust Bush.

moving to another state that has no state income tax [...] but i'm sure they make up for it with something else

Sales tax, or use tax.

You guys are lucky to be able to choose between the two. We have both and to top it off the progressive kind.

Well, no matter where you live you have national income tax; The question is whether you also have it from the state. Most, but not all, states have sales tax. Use tax is another question entirely.

I'd not whine if we had progressive taxes.

Yeah, but you end up owning a valuable piece of property. If owning a dwelling weren't more cost-effective than renting one, landlords would be out of business, wouldn't they?


You make a good point, but it's more complicated than that.

A common mistake that people make is taking the point of view that "...renting instead of buying, you're just throwing your money away." In fact, you are receiving value for that money: You have a roof over your head, shelter, a place to live.

As for cost effectiveness... Let's say you're looking at a $150,000 house with an 8% mortgage for 20 years. 10% down payment.

Rough numbers, you're looking at about $1025 month in payments, with total interest coming to about $108,000 on the $135,000 principal. Let's add another $100 a month for property taxes, and another $100 a month for utilities, and another $100 a month for insurance, and another $75 a month for repair and upkeep (for example, about the time your mortgage is finished, your roof will be too). So, figure $1400 a month you're paying to have a roof over your head and eventual ownership of that roof and everything underneath it.

Chances are you could rent a comparable house or condominium or whatever for about $900 a month, saving you $500 a month.

Take the $15,000 down payment you were going to use to start your mortgage and start an investment account that will return 8% anual interest compounded monthly. Add the extra $500 that you're saving each month by renting instead of paying a mortgage, and what do you have to show for it?

Well, you don't have that "valuable piece of property" that might be worth more, or might be worth less than the $150,000 purchase price. Sometimes real estate values go up, sometimes they go down, and remember, that property is now well used and 20 years old!

I guess all you have to show for your rental is 20 years of shelter, and, darn it, I know there was something else, oh, yes! $370,375.65 that, due to the marvels of compound interrest, is now sitting in your investment account.

Now, there are positive intangibles to buying a home -- pride of ownership, privacy, security, knowing that some landlord can't kick you out on the street, being able to own any pet you want, etc. But, there are also positive intangibles to being a renter, like when the toilet overflows or the furnace quits and it's 10 below zero outside it's the landlord's problem, not yours. Remember the old joke? "Hey, you gonna play golf this weekend, or do you own your own home?"

The choice of renting vs buying is NOT the obvious, no-brainer decision that most people think it is.

tanstaafl.

When we looked at buying vs. renting, for a comperable living space the payments were always lower for buying. Of course, that doesn't take into account the added costs of owning a home.

For us buying a house wasn't an investment, though. We wanted a house and it was more afforadable to buy one (in this town anyway). If we wanted to stick with an apartment, however, we could have gotten off much cheaper.

Can you find me an example of the price of an 'average house' decreasing over a 20 year period?
Although house prices certainly fluctuate down as well as up, most people wait out price drops rather than selling (often trapped by negative equity) so during a period of depressed prices fewer houses are sold. Conversely, when prices are rising people tend to believe that they will keep rising and that increased risk means increased returns, hence more houses are sold.
These effects effectively ensure that average house prices always increase over the long term.
Obviously there are always exceptions. Houses at the extreme end of the market are more susceptible to market forces. (Co-incidentally that's why you should not extend your house to be the biggest in its neighborhood - you'd be better off moving to an average house in a neighborhood of larger houses)
Remember also, that $370K will be worth far less than it is today. I'd bet also that the $150K house would be worth $500K.

With all that in mind, you did make an interesting and compelling case for considering renting. One point that you really didn't hammer on is that a house is a big committment. It costs time and money to buy and sell a house which eats into short term gains and exacerbates short term losses. If you are in a career or have a persona that demands frequent moves then these costs will certainly mount - and riding out an equity trap by becoming a long-distance landlord is not always a good solution either.

With all that in mind, you did make an interesting and compelling case for considering renting.

I agree, and as someone who's paying out the nose for renting, it makes me feel a lot better. At a time when the low interest rates are causing sellers to demand ridiculous sums of money for even the slummiest of homes, buying certainly doesn't make sense for me right now.

However, I think one minor flaw in Doug's otherwise brilliant case is that with a mortgage, you more or less know what your monthly payment will be for the duration of the payoff period. In this case, it ends up costing $336,000 or so after the 20 years. But with rentals, you're subject to a rent increase nearly every year, especially if you're in a "hot" area where everyone wants to live. I don't know if those rent increases are typically high enough to erase the 8% yield of the hypothetical investment or not, but it certainly eats into it enough to make one seriously consider buying.... Doesn't it? (Says the guy who knows nothing about math and even less about economics.)

Can you find me an example of the price of an 'average house' decreasing over a 20 year period?

How do you scope average? Certainly many inner-ring suburbs would qualify, if average isn't nationwide or whatever.

As for cost effectiveness... Let's say you're looking at a $150,000 house with an 8% mortgage for 20 years. 10% down payment.

Are interest rates up that much already?

Rough numbers, you're looking at about $1025 month in payments, with total interest coming to about $108,000 on the $135,000 principal. Let's add another $100 a month for property taxes,

My $53k house has ~$900 annually in property taxes; $100/mo sounds low but I suppose it depends where.

Hm, then how all this plays out for landlords? Lower cost of capital (relative to mortgage)? Cheaper upkeep due to economy of scales? Nah, those differences are probably too small.

How would you compare the cost of buying a house vs. building one? That might be the answer. Here in Croatia it is not uncommon that gross margin for builders who sell new houses (or, more often, condos) runs as high as 40%. (The price for a decent new condo, unfurnished but with central heating (rarely air-conditioning) and bathroom fixtures, is typically $120-$150 per square foot.)

As for cost effectiveness... Let's say you're looking at a $150,000 house with an 8% mortgage for 20 years. 10% down payment.

In the US, the interest payment on a mortgage is deductible from your taxable income (IANATA). In the first few years of a mortgage, payments are almost entirely interest and thus almost entirely tax deductible, so that your $1025 per month results in about a $12,000 reduction in taxable income. If a home buyer is paying about 30% in state and federal income taxes, that's about $3600 in taxes not paid, so the $1025 monthly mortgage payment is effectively reduced to $725 for the first several years. The tax code is extremely biased towards home ownership.

-jk

$120-$150 per square foot... and bathroom fixtures

Wow! For that kind of money them throwing in indoor plumbing is nice.

Good points Doug,

But you also have to take into account where in the country you are. In Hartsville, SC, an apartment costs me about $550/mo. I am buying a 1500 sq ft house in good condition (new septic system, new heating and AC, roof is only 6 yrs old) for $92,500. I locked in my interest rate at 4.625% for a 30 year mortgage and paid 5% down. My payment comes to $633/mo including insurance, PMI and property tax. I'm not going to add in utilities, because I'd have to pay them in an apartment anyway. We'll add $67/mo for upkeep and make it an even $700.

So I take my roughly $5000 and start an investment account that will return 4.625% annual interest compounded monthly. Add that extra $150 I'm "saving" each month by not paying my mortgage. Now subtract the between $3000 and $4000 that I get to deduct from my taxes for the first 15 years. If I'm in a 15% tax bracket, that ends up about $525 less taxes.

Here's where I am at the end of 30 years. If I rent I end up with a grand total of $114,319.65 in my investment account. Not only do I not own a house, but I don't even have enough to buy the house that I bought before due to appreciation.

If I buy, I own a house. In addition, my area is fortunate enough to enjoy 3.49% housing appreciation right now. At the end of 30 years at that rate, my house is worth $258,876.92. We'll deduct $10,000 for major improvements and expenses outside the normal maintenance over the years, and call it $248,876.92 I also get to decorate any way that I'd like, tear down a wall if I don't like it anymore (did that two weekends ago), run network cabling through the walls, have my chocolate lab as an inside dog (who as an added bonus, has half an acre to play in the back yard.)

In my situation, I'd be an idiot not to buy.

Here's where I am at the end of 30 years.

Only if you make it that long, though. I'm a bit bitter because we bought a house and had to sell within two years because I lost my job and had to move to a new city. So even though our house appreciated in value, due to closing costs we lost a ton of money.

I think there are better investements than owning a home, espeically depending on where you live (here in Texas and especially San Antonio it's VERY economical to buy a home- it's almost a no brainer). Hower, the point is that it is more than an investment. If what you want (and not everyone does) is a backyard, freedom to do whatever you want to it (which, by the way, isn't necessarily true- I can't knock out a wall or put up a new one without first consulting with the city), and all of the other joys that come with owning a home, then I'd say there's a strong posibility buying a home is the right thing to do. However, if you like the convenience of renting and the lack of responsiblity, there's a lot to be said for that too.

I personally enjoy having my own little piece of the world that I call my own (though at this point it really belongs to Wells Fargo except for a door handle or two ).

my area is fortunate enough to enjoy 3.49% housing appreciation right now

He have crazy house price appreciation in the UK at the moment. Our house has gone up 15% every year since we moved in in 2000. We started off with £25,000 capital and we currently have about £160,000

The housing market in the UK is a bit mad. I know people who sold their houses and moved into rented houses two years ago because they thought property prices were going to crash, big mistake. If we do get a price crash at some point I will probably buy a property to rent out, I don't really trust pensions so I would like some investment somewhere else.

Can you find me an example of the price of an 'average house' decreasing over a 20 year period?

Yes.

Housing prices are cyclical, depending on the economy and supply and demand. In Alaska in the 1970's during the construction of the trans-Alaska pipeline, many houses sold for nearly double what the same house brings today. Some banks went under when the pipeline boom ended and hordes of people walked away from their mortgages, being a hundred thousand dollars or more upside down.

I think it is highly unlikely that the grossly inflated housing prices in the high-demand areas of California are going to stay. California as a state is in so much economical trouble that it is not inconceivable that it could see financial collapse. What will happen to the real estate market then?

Ask your grandparents what happened to property values across this country in 1930.

You "youngsters" think that property values only go up, because that's all you've ever seen. I'm here to tell you that it just ain't so!

Now, I have spoken to a few people about this topic since I made my first post last night, and there are two holes in my logic that some folks on this bbs have approached but not hit directly.

1) My suggested interest rates are high based on the market situation today. However, in my defense, the key word in the previous sentence is "today". I vividly remember being grateful that my mortage rate was only 11% when new fixed-rate mortgages (if you could even get one) were going at 18-20%, and some people who chose variable rate mortgages (remember those? Prime rate +x%) were as high as 24%. Historically, 8% might not be that much out of line. The same arguments apply for my suggested 8% rate of return on the investment account. You won't get that today without high risk. But 20 years ago you could have gotten that much or better putting your money in a bank savings account.

2) I'm told that my estimation of rental cost was too low -- that to rent the equivalent of the hypothetical $150K house would cost more than $900 a month. I have no good feel for this -- it has been nearly 30 years since the last time I rented, and I have no good idea of what it's like to do so today. My $900 was just a wild guess, and I might be justifiably called to task for it.

There is a long-held rule of thumb that from a landlord's perspective, you should try to set the monthly rental price at 1% of the value of the building. If that is what is truly happening in real life, then my arguments lack merit.

tanstaafl.

So I take my roughly $5000 and start an investment account that will return 4.625% annual interest compounded monthly.

If that's all you're getting on your investment account, you need to consider some different investments. The S&P500 averages out to about an 11% gain per year, despite the bubbles and busts. While I think it's entirely possible to beat that (my annualized 401k returns are several percentage points higher than the S&P500 returns), you certainly shouldn't be doing any worse than the market. Try running those numbers again with 11%, and see how much cash you end up with.

In my situation, I'd be an idiot not to buy.

Agreed. Wish I could do the same here in LA.