Profile picture for fsxv13

Argument for or against buying?

Assume purchase price of house is 500K, 150K down, 350K mortgage over 30 years with a 3000 dollar a month mortgage/RE tax payment. Assume this house will lose 10% after the first year of purchase and possibly another 5 to 10% the second year (450K after first year,405K second year). From there on out historical norms apply for the argument (price follows inflation). That's a 95K loss, but you can sell it after 10 years and lets just say get 405K back. Same house rents for 3000 dollars a month, or 36,000 dollars a year. If rent never increases, at the end of 10 years I have spent 360,000 dollars and cant recoup any money. What's my argument against buying in this situation? would it be better to wait two years in this situation? I'm a husband discussing this with his wife, and I wouldn't mind waiting longer to buy while she would like to buy sooner rather then later. Thanks for any help or insight.
  • August 17 2009 - New York
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Answers (42)

Profile picture for lowbuyer
Here's a NYT article about foreclosures in Westchester.  I think Westchester has experienced a mild bubble.  It never was as big as the rest of the country, but still a bubble nonetheless.

http://www.nytimes.com/2009/05/17/nyregion/westchester/17mortwe.html?_r=3&pagewanted=1
  • September 09 2009
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Profile picture for lowbuyer
fsx, I live in Westchester and also am looking to buy in Westchester.    We all do know prices will not be going up anytime within the next 5 years given that plenty of interest-only loans will be resetting with principal payments in the next few years(NYT article today),  job losses aren't decreasing, many more foreclosures coming due.  However, despite all that, metro-NY hasn't seen much of a bubble as the prices here have always been inflated.  I'm in the market for a condo.  A few mos ago I found sales stats for the late 90's/ early 00 on a complex I was interested in purchasing in.  I ran the #'s and added app 3-5% a year for inflation and found that the going prices were only slightly above what they should be, like a condo should be selling for 260k, when it's at 280k now. You're not going to get a precise answer as to whether you should rent or buy, but prices will continue to decrease in Westchester, so if you're buying just on logic, then wait at least a year or so.  If it's for the sake of your marriage, well, that's a more emotional decision and no one can help you there. 
  • September 09 2009
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Profile picture for Lady Chattel
Never did I feel so good about being a renter and having been one for the past 2 years, and I suspect for the next 1 or 2.  

Gee, remember Alpine yapping about NYC and how it would never fall.......good times good times.......NYC was late to the game but you are nevertheless joining the party.  Time is on your side.
  • August 21 2009
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Profile picture for Mr Caveat
You think that's stupid because you seem to be mocking me calling the idea ridiculous, yet you are basically saying only an idiot would buy now.  So which is it?  Am I ridiculous for renting based on financials or ridiculous for not buying within the last 5?

plans cant be as resolute as the one you proposed. had you come in 2006 this conversation would have been very similar, most of these posters have been here saying "wait and see" for that long. you shouldn't try to plan to buy in 2015, you should plan to buy when home prices are, by your estimation a sound financial investment and not a second before or after. also your plan assumes 10 years of renting. now this may turn out to be correct, i am not saying that there isnt. there is every possability that people who started buying in 2007, 2008, 2009 and even 2010 will continue to default on their mortgages in historically high levels causing continued declines and pushing the "doomers" like myself to continue to say "wait and see", "wait and see", "wait and see". i myself am tired of "wait and see" in 2007 i predicted (privately) that the recession would end right around october this year. but today, even with the street going nuts and helicopter ben's statement today i still have no confidence in that prediction. the mess that we are in is systemic, banks are failing at a rate of 4 per week, azrobs chart says it all... its not over. now how can someone then make a plan? you cant. you just wait and wait and wait and wait and wait untill you cannot stand it anymore, then you break down and buy the best thing you can at the best price and you are done.

but very very few people rent for decades at a time because a mortgage is a different beast. its a leveraged bet, sometimes exceeding 30:1 wherein it almost always does accrue equity. you dont compare it to renting over a decade, just like you dont compare owning a bmw to owning a civic. if you own a bmw, it certainly wasnt a financial decision to buy it.(no i am not saying never buy and no i am not saying buy now nor am i saying buy in two years, 3 years or 5 years. buy when it makes financial sense, if you want to buy, you should be in the market now, and watching housing prices very closely.
  • August 21 2009
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Profile picture for Mr Caveat
or to put it one more way,

why would you want to pay 3000 a month for 30 years when you could be paying 2400/month if you wait a couple of years?
  • August 21 2009
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Profile picture for Mr Caveat
ok, i'll take on now the challenge of convincing you that azrob is right...

we can start with a multiple choice test.

what determines rents?
a) demand, ie proximity to job centers, quality of neighborhood and quality of accommodations?

b) economic fundamentals, ie jobless rates, depressive forces in job centers or falling wages

c) the calculations the investor makes before buying the home (ie mortgage payment x, therefore rent must be at least y or i will not buy this home)

d) all of the above

in fact its D, and as you stated earlier rents are falling. if home prices fall 20% over the next 2 years, you can also expect that rents would fall at least 15% over the next 5-6 years. maybe more, maybe less, its really not nearly as simple as that, but its a factor that takes your 360k in losses from what you essentially intend to be a lose-lose scenario and reduces it significantly. you have essentially taken the position that 10 years from this moment, rental prices will experience enough upside to average a flat interest payment... consider though that assumption would require rents to go from 2550 in 2015 to 3450 in 2020(or higher) or rise by 35% in 4-5 years, 7-9% a year on average. its extremely likely that the total you pay after 120 months is between 300,000 and 320,000.

if you wanted to "give renting the edge" you could, not dishonestly, suppose them going off by a third over 4-7 years... but such is the cross of the crystal ball lifestyle... no certainty. you might pay as little as 250k. the whole of the argument for the sake of simplicity assumes too much. the 20% downside, what is that based on? "price follows inflation" assumes inflation, while its true that the minority express this opinion vocally at the moment, this minority is continuing to be validated when they suggest that our economy wont experience any real inflation as long as home prices are trending down and that we could still very well experience a strong deflationary move first. in new york you have to know that when every single person tells you to do something before its "too late" then you usually do just the opposite.

most of the people here will tell you to look for a good deal and shop around. i actually wouldn't think it foolish to spend those 2 years with an agent(less sales more expert) learning about your market, looking at data trends and such. the most sound advice is to wait and see. thanks azrob and jkonstant.

as per hoang his math is terrible. you dont save 40,000 in the first year buying v renting, you save maybe 4800 in principal payment, the money that goes to servicing interest and taxes may as well be rent. you do get a tax deduction, i'll say thats worth about 7000-8000 a year to you.  he seems to be under the impression that your return on 150,000 over 10 years will be a sparse 20,000...you can get a better yeild than that in a 10 year treasury... of course i can beat those returns now with a ginnie mae trust fund, 5% yield and FDIC insured to 250k
  • August 21 2009
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Profile picture for fsxv13
http://anotherfPUT A U IN HEREckedborrower.blogspot.com/

"but the assumption that one would continue renting for more than 5 years before buying for a purely financial decision is rediculous... "

I was reading that when we first looked for a home in 2006.  That would make this coming up on 4 years, I don't think it is a good time to buy, and I don't think it will be for awhile.

5 years is not an assumption, it's a reality of my life at the moment.

You think that's stupid because you seem to be mocking me calling the idea ridiculous, yet you are basically saying only an idiot would buy now.  So which is it?  Am I ridiculous for renting based on financials or ridiculous for not buying within the last 5?



BTW you need to copy and paste that link then edit so that it says another f worded borrower
  • August 21 2009
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Profile picture for Mr Caveat
and i just had to comment, arm loans are great when used properly. "risk tolerance" aside, anyone who's goal it is to pay off their loan early should use an arm.

1) the interest for the first 1-7 years is 50-80% of what it is on your fixed rate loans. that means that if you were to buy a home that you can actually afford (roughly 2-2.5x income) your monthly payment takes off more principal. in addition you have the flexibility to go on a vacation to las vegas and merely pay off the minimum payment one month...

2) every dollar you amortize expect to see a corresponding dollar in interest over a 30 year loan, so paying off your loan early (after say 10-15 years) gives you a pretty good roi vs a traditional mortgage...

also i am curious, in your example, under choice A) buy, in the first 3 years, of the 108,000 you pay you "get" 15000 applied to principal while the rest goes to taxes and other fees or interest. 93,000 of it is lost. you also lose an ADDITIONAL 95,000 of your original down payment of 150,000. that's not the bank's money, that's your money! in addidion you lose the opportunity to put that 150,000 into the house after a 20% decline, meaning that you lose the opportunity to pay down the mortgage by 95k, costing you about 180k over 30 years, money that you wouldnt need to pay. if you think offsetting taxes are going to make up the difference, you go right ahead and buy. me, i would look at those projections again in a couple of years
  • August 21 2009
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Profile picture for BMFPitt
If renting is forever cheaper does that mean you should do it for life?

It'll never be an apples-to-oranges comparison.  If you are going to rent the same place for 30 years, then obviously you'd be better off buying (maybe not right now, but at least when things stabilize.)  Actually, it's New York so maybe it would be MUCH better to rent the same place due to rent control (which I absolutely despise, but as long as it's there, use it - at the end of 30 years your rent might not even cover the landlord's property taxes.)

But people rent (in normal free market areas) because it gives them flexibility and means not having to worry about repairs, etc.  It's a lifestyle choice as well as a financial choice.
  • August 21 2009
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Profile picture for Mr Caveat
who exactly was it who told you to wait 10 years before buying? i disagree with almost all of your assumptions, but the assumption that one would continue renting for more than 5 years before buying for a purely financial decision is rediculous...

PS, if home prices fall 20%, then the investor could offer competing rentals well off the 3000 dollars that rents are currently at...
  • August 21 2009
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Profile picture for Blue Nile
When you do show her that graph of Mortgage Delinquencies, use the full resolution so that she can see the percentage and dates:

http://images3.zillow.com/is/image/i0/i1/i5338/IS141j5ecu4tj8j.jpg

(unfortunately you will need to paste it into the browser address bar as Zillow's dialog "links" always automatically add ".www" before ".zillow" making any attempt to create links to these images useless).
  • August 21 2009
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Profile picture for fsxv13
Can you link to the source, that image is too small to see? I can barely make out the title "Residential Mortgage bankruptcy".

Again, I don't live in Phoenix or California or Detroit or Florida.  I live in the NY metro area.

Prices are currently declining but foreclosures in the neighborhoods I want to live in have been rare.  In response to price declines in homes rent is also declining.

Where do you think the NY Metro area, or more specifically, the Westchester county market is going to be headed?  It dropped I believe 12% this past year, I'm betting it will drop another 20% in the next two years.

Foreclosures in the NY Metro area, specifically the city are rarer due to the amount of Co-ops.  While this is not true in Westchester, I can't see Westchester having the same type of foreclosure rates as the aforementioned areas in the second paragraph.

If you have any other links/data relating to Westchester I'd be more then willing to check them out :)  Thanks for the replies so far. 
  • August 21 2009
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show your wife this graph of mortgage delinquencies. Foreclosures follow about a year after delinquency, and are the number one cause of our dropping prices. Today, we have a temporary new buyer's credit ending december 1, and temporary moratoriums on foreclosures backing up supply. Temporary solutions will not change a longterm problem.
  • August 21 2009
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Profile picture for fsxv13
Thanks everyone.  As I said before I am in the rent for another two years camp but my wife isn't, we'll have to sit down and discuss the possibilities more.

Pasadenan, one thing, since you have taken the relationship factor into it all, I just want to let you know she does corporate taxes for Ernst and Young so the spreadsheets and all that are going to be done by her and make more sense to her then me ;)  Still, you are right, emotions and priorities will play a part of course.

Thanks for the math Hoangchauphan it is appreciated :)

AZRob, while the examples I have set are of course not set in stone, they somewhat mirror what has been happening for us.  Of course you don't HAVE to rent for 2 or 10 years.  But we have been renting for 7 years now.  If we wait another two, that's 9 years.  10 is a nice round number.  If we had bought 5, 6, or 7 years ago...  Would we have saved money despite the declining market?  We live in NYC and are thinking of moving to Westchester, averaging out rent over the last 7 years we have been paying approximately 1800 per month over the course of those 7 years.

I'm only 32, so there has never been a time for me when rent was more expensive then buying, so if that has existed in the past, I've never lived through it in New York.  While Real Estate prices are dropping in the NY Metro area these days, rent is going down right along with it...  So what?  Never buy?  If renting is forever cheaper does that mean you should do it for life? 
  • August 21 2009
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Profile picture for Blue Nile
As I stated before, even though you need to hear your wife out, and draw out her priorities and the weighting of the priorities, you still need to do the spreadsheet for the bottom financial line, under each senerio, comparing the buying verses the renting.  And as Roberto points out, you need to include the probability of next year and 2 year following value in that spreadsheet comparison.

Don't forget to do that weighted average spreadsheet for your wife's priorities, and to plug in your own weightings for the priorites so that you can see which options match both of your sets of priorities better.  Part of that is how much you will have to be working to make the payments and maintain the house verses how much time you will have to spend with her.

Remember, the spreadsheets and charts are for YOU; don't bog down the discussion with charts and numbers that make no sense to your wife.

Of course I don't believe the numbers just randomly thrown out, that it presently is a savings of $110k to buy verse rent presently...  But if you really believe the value will drop an additonal $95k in the next two years, then waiting two years and buying at market value then would be an approximate savings of $200k for buying verses renting.

So, as I stated before; don't "guess"; plug the numbers and options into the spreadsheet to compare, and print out the graph for the break even points.  But don't argue money with your wife; instead, evaluate the priorities, and find a way to meet her desires and expectations.  Given the same input data, emotional intuition, and good linear logic mathematics come up with the same solutions.  Right now your input data is not even close to being on the same page.
  • August 21 2009
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There is not guarantee the home prices gonna drop 10%-20%, that is the speculation. The home prices will inflate 4.75% annually by historical and Wall Street's estimate ( It's not 4.75% at anywhere, Death valley, CA is 0%. Los Angeles is 4.75%. Manhattan  is 7% annually)
  • August 20 2009
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FALSE DILEMNA: the logic falisy of presenting only two choices:
1. buy today.
2. NEVER buy for 10 years...

If you want to buy, buy. Don't try to rationalize a bad decision by terrible thinking. The other option is quite legitimate:
3. BUY in a year or two, at a lower price.

And actually, what someone with brains would do, is estimate a probability that the home goes down another 50k, goes down 100K, stays the same, whatever, and multiply the expected value of each result times the probability it happens. This would give you an expected return of each choice, buying and selling.

Given the market dynamics over 500K, I'd say it won't take long to figure out that on a risk /reward basis, buying that home today, [with news of rising delinquency rates on prime loans, rising foreclosures on prime loans, continuing job losses, etc] would pencil out as one of the all time dumbest investments ever.
  • August 20 2009
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Assume the rent unchanged in next 10 years.
You buy the $500k house, down-payment $150k, mortgage $350k at 5.25 interest rate with 30 years term.
* 1st year, your mortgage balance is $345,065 you save $4,935 (differential of mortgage balance) + $36,000 (rent) = $40935. (total of 1st year saving)
You pay in 12 months: ($1,933 mortgage monthly payment+$500 tax+$200 insur.& maintenance) * 12 months = $31,596.
$31,596.+ $2,250 (interest of $150k of 1 year CD at 1.5%) = $33,846 (your loss in 1st year)
$40,935 save - $33,846 loss = $7,089 save.
if 1st year the home prices drop 1.4% you are still OK.
* 2nd year, your mortgage balance is $339,864 you save $10,136 + $72,000 (rent) = $82,136. (total of 2 years saving)
You pay in 24 months: $2633 (mortgage payment)* 24 months = $63,192.
$63,192+ $4,534 (interest of $150k in 2 years CD at 1.5% compound) = $67,726 (your loss in 2 years)
$82,136 save - $67,726 loss = $14,410 save.
if 2nd year the home prices drop 2.9% you are still OK.
* 10th year, your mortgage balance is $286,819 you save $63,181 + $360,000 (rent) = $423,181 (total of 10 years saving)
You pay in 10 years: $2633 (mortgage payment) * 120 months = $315,960.
$315,960+ $24,081 (interest of $150k in 10 years CD at 1.5% compound) = $340,041 (your loss in 10 years)
$423,181 save - $340,041 loss = $83,140 save.
if 10th years the home prices drop 16.6% you are still OK.
  • August 20 2009
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Profile picture for fsxv13
I'm not asking if the market is going to go down. What I am asking is this:

I'm trying to give renting the edge here with the home value losses and no rent increases, but if at the end of the ten years renting has cost me 360K and buying and selling my home has cost me 250K (in losses and maintenance and all that)...

Is buying and selling not better in this scenario?

The bottom line is at the end of ten years I will have spent 360K and then have to go buy a place anyway....  Am I wrong?  I'm hoping someone can tell me WHY renting, after ten years, would be the better move here.

I know why renting is the better move over the course of two years.. 100K+ loss vs 50K in rent.  I save 50K, but I'm not asking that.  I'm asking about over the course of ten years...
  • August 20 2009
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Profile picture for BMFPitt
I plan on living the home long term (over 10 years) so I feel that in that time frame any further loses in the property value will be regained by the time not for any reason other than the market always has cycles of up and down, although this is a bigger down than usual but I think it just means a longer recovery.

That would only true if the prices over the past 5 years had any basis in market forces.  It got that way only because of massive drunken lending binges to anyone with a pulse.  There is no rational reason to believe we will see such a thing again for the next 50+ years.  When the "recovery" happens, it will start with a long period of flat (or at least flat in real dollars) prices.
  • August 20 2009
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it doesn't matter how long you keep the home.

Buying a home for 500K when you think in a year or two it will be 400K is brainless. IF you really want to throw away 100K so badly, buy it at 400K in the future and give 100K to a worthwhile charity.

"flip of the coin" if it is going to get better or worse. Lets see:
1. TODAY delinquent and in foreclosure loans hit a new record.
2. many state budgets still require spending cuts, leading to job losses.
3. jobs are still being lost. Unemployment only dropped due to 600,000 previous workers completely quitting looking for work. Payrolls dropped 250,000 last month alone.
4. Foreclosures are being held up, but not stopped. That game can't go on forever.
5. The $8k stimulus runs out in a couple of months.
6. The FED has announced it will quit acquiring long term agency/govt. debt at the end of this year, that and that alone has pushed mortgage rates down to 5%.


At the 500K price, the odds of prices going down are probably 99% at this point. Your argument might work on the 100K starter home...
  • August 20 2009
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Profile picture for BigMoose81
I will explain my scenario for why I am fine with buying now, but this isn't the case for everyone and I am being picky about what I am looking for and not settling for less than I want.

I plan on living the home long term (over 10 years) so I feel that in that time frame any further loses in the property value will be regained by the time not for any reason other than the market always has cycles of up and down, although this is a bigger down than usual but I think it just means a longer recovery.

If your buying for the near term future I would think it is a flip of the coin. People say its going to get worse others say that the stabalization is on the way. Timing these things are too impossible, do you listen to the first group and wait potentially missing low rates and possibly low home prices or do you buy now and risk over paying for a home and loosing value with it.

Just my 2 cents.
  • August 20 2009
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Profile picture for frisky1
fsxv13 - are you reading www.njrereport.com ?
of course its mostly NJ but they do cover a little NY and a ton of NYers read it. don't just read the posts but the comments. many people just like you trying to justify/unjustify buy/rent. and plenty of people to offer advice. It will make your head will spin.  maybe there is a new york one too, I dont know.
  • August 20 2009
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Profile picture for moem
  • moem
  • 13 contributions
I just bought.  Given the $8000 credit, that eroded my closing expenses.  My market has only gone down .2% in the year & has risen in the past few months.  If I sell, I can do it myself; I sold the last one.  I put 20% down at 4.87% and can rent to cover the mortgage if there's a disaster.  Rentals in this community range from about $1000 to $1700 for comperable living.  I have a hugely secure job. No one knows when the bottom will be, but if you wait too long, not only might the price rise, but I expect interest rates to climb.Are you looking at specific houses?  I looked for a year or so & jumped when I saw something I could afford in this neighborhood (top schools).  I like the house.  I like to decorate/remodel.  I like to garden.  I now have a dog. If you have most the strengths I listed in the first paragraph, look for houses.  Then buy based upon your lifestyle.  Screw market considerations.  There's more to a house than cash.
  • August 20 2009
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Profile picture for Lady Chattel
I know for sure that in the past two years I have saved plenty by renting.  I don't think for a decade I could say the same, if prices for homes start to uptick as opposed to continuing their descent.

If you present your wife with actual numbers and tell her that you are willing to let her use part of the savings to buy something she wants to buy ,you may actually be able to convince her.   As long as prices for homes in your area is falling there is no reason to jump in, better to buy in a stable market than a falling one.   Throwing a little bait her way doesn't hurt. 
  • August 20 2009
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Profile picture for fsxv13
Ok, so I realized I should answer my own question if I wanted to contribute to this thread :P  Have been searching for a way to add more.  Obvious solution is obvious...

I understand the market.  My wife wanted to buy back in 2006 and every year since and I have been saying no since then.  She actually believes I never want to own a house at this point, which is false.  I'd love to own a house but I don't like losing money or playing games with it.

I know about the extra carrying costs and all that but what I am saying is that even at the end of the ten years, if my home is worth only 400K, (and I sell it at that), I'd still have spent less money in the end then spending 360K on rent in the same ten year span no?  Remember I'm making a huge assumption that rent never goes up for ten years.

I'm trying to give renting the edge here with the home value losses and no rent increases, but if at the end of the ten years renting has cost me 360K and buying and selling my home has cost me 250K (in losses and maintenance and all that)...

Is buying and selling not better in this scenario?

And yes Pasadenan, you are on the right track as well, relationship has its own non-monetary value.  My wife is worth more then our savings. 
  • August 20 2009
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Profile picture for Blue Nile
ARM loans work good for some people that have more risk tolerance and can stand fluxuating interest and fluxuating payments.

And Option Arms still do have some place for some self employed people that have strong business, but where the cash flow is not steady but rather comes in spurts.

But the real question is how many option Arms have you seen issued lately, and what qualifications are being used to write them?  Some of the option arms that were issued without proper qualifications is the next major thing to drive up foreclosures and thus drive down prices.
  • August 20 2009
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Profile picture for Lady Chattel
The ownership rate is going down as we write.....normalacy is returning......of course I still see the ARM loans being offered, tsk tsk.
  • August 20 2009
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Profile picture for BMFPitt
Seriously?!  If those were the criteria everyone had to follow, about 1% of population would own a house....99% would rent.    In this economy in case you didn't notice, almost No one's job's are 100% safe for next 5 years, even doctors and lawyers are feeling the crunch!  Although I guess a point can be made that if everyone did fall into these 4 points before buying a house, we might not be in the recession we are in.....

A long, long time ago (like 10 years) banks used to actually check out these factors and would only loan money to people they could reasonably expect to pay it back.  Crazy, I know, but it's actually true.  They even made people have large down payments that were saved with their own money.
  • August 20 2009
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Profile picture for Gearhart66
"At the bare minimum, you should only buy if 1. You think your local market will be at least stable (i.e. not anywhere that was too bubbly or that has high unemployment.)  2. Rent is AT LEAST equal to PITI, if not slightly more expensive.  3. You know there is little to no chance you'll need to move or lose your job in the next 5 years.  4. You know you can handle the payments without hurting your lifestyle (i.e. PITI <= your current rent + the amount of money you put away and don't touch every month.) "

Seriously?!  If those were the criteria everyone had to follow, about 1% of population would own a house....99% would rent.    In this economy in case you didn't notice, almost No one's job's are 100% safe for next 5 years, even doctors and lawyers are feeling the crunch!  Although I guess a point can be made that if everyone did fall into these 4 points before buying a house, we might not be in the recession we are in.....
  • August 20 2009
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