Zillow Advice: Rent vs. Buy - Reasons why you might consider Rent-to-Own right now

I'm of the opinion that if ...

Wed, 17 Jun 2009 15:37:00 GMT

I'm of the opinion that if you buy today on a 5-7 year time horizon, both the $170k and $200k would be underwater if you consider selling costs, so I was only considering the 10+ year occupancy saw the extra cash in your pocket as having a higher benefit than future resale profit. I also don't count the savings from renting because I think it's foolish to buy a house when it's cheaper to rent one, so as I noted this only applies to places where rent >= buy.

And this is where your argument falls apart.

I think the best way of explaining this is, "I believe inflation will average 8-12% for the next decade. Do you believe your wages will increase by 8-12% over that period?"

Back to inflation in history: ...

Wed, 17 Jun 2009 15:25:00 GMT

Back to inflation in history: Homeowners with mortgages through that period did especially well. ... Their wages rose.

And this is where your argument falls apart. Compare the rate of unemployment (using the U5 or U6 figure today) and wage trends for the two periods. Add to that, as BMFPitt pointed out, the general residential RE market trends leading up to both periods, and you would have a difficult time making the case that conditions in the 70s with regard to employment, wages and house price trends are comparable to today.

Well, of course I was taking ...

Wed, 17 Jun 2009 15:05:00 GMT

Well, of course I was taking it for granted that the any calculations were assuming an average 5-7 year occupancy, that hardly needed saying, did it?

Increase your downpayment ...

Wed, 17 Jun 2009 15:01:00 GMT

Increase your downpayment a bit on the future cheaper home(which should be easy if you are saving your money that cheaper rent affords you) and the two payments quickly become equal. In addition:

1. the one owner is upside down, cannot sell if a sudden life change comes along.
2. The buyer at 7.5% gets a better return on any extra money used to pay down the mortgage.
3. The 170K buyer has an easier time paying the house off completely.

So as long as you understand ...

Wed, 17 Jun 2009 14:55:00 GMT

So as long as you understand that, you should probably use that information to present your argument, as opposed to saying, "Do the math." If you are to assume the buyer will stay in the mortgage for the full 30 year term, he will come out ahead with the $200k. The thing that detracts from that is the fact that staying in a mortgage for 30 years is incredibly rare these days.

"Assuming 3.5% down, the ...

Wed, 17 Jun 2009 14:43:00 GMT

"Assuming 3.5% down, the mortgage payment on the 200k @ 5% is $1036.07. The payment on the 170k @ 7.25% is $1147.06"

Well of course I know the actual payment itself is going to be higher on the lower priced home, but as you say:

" I would still say the 170k is better because you won't be 30k underwater on it"

Exactly! Being in negative equity is a far worse situation that paying a few hundred extra a month interest (which is tax deductible as well!)

Guys, do the sums for heaven's ...

Wed, 17 Jun 2009 11:33:00 GMT

Guys, do the sums for heaven's sake - you're saying that a 5% mortgage on a 200K house is better than waiting a year and getting a 7.5% mortgage on the same house, which is now worth 170K.

Assuming 3.5% down, the mortgage payment on the 200k @ 5% is $1036.07. The payment on the 170k @ 7.25% is $1147.06. Now under most circumstances, I would still say the 170k is better because you won't be 30k underwater on it, but as long as you keep saying "Do the math" I can't resist but to do it and smack you over the head with it.

On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%

Maybe 3% of peak price, but where I'm at it costs about 8-10% to rent a house in the range of what I'd be looking for. I know that because I spent a few months looking at house rentals before I bought. Taxes bring them up to just about par, with maintenance costs (and still-falling prices) giving a slight edge to renting, but not by too much.

If you borrow a million dollar house (renting it), you will pay only 3% in rent each year.

I'd like to see where you can rent a million dollar house for $2500/mo. That gets you something in the 300k-350k range here.

it's still much cheaper to ...

Wed, 17 Jun 2009 05:53:00 GMT

it's still much cheaper to rent than to own the same thing. On the coasts, yearly rents are less than 3% of purchase price and mortgage rates are 6%, so it costs twice as much to borrow money for a mortgage than it does to borrow (rent) the house itself. Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is three times the cost of renting. Buying a house is still a very bad deal for the buyer on the coasts, but it does make sense to buy in Michigan and some other places where prices have fallen into line with salaries and rents. Check whether you should rent or buy in your own area with this NY Times calculator.

f you borrow a million dollars to buy a house, you will pay 7% or more in interest, plus property taxes and maintenance.

If you borrow a million dollar house (renting it), you will pay only 3% in rent each year.

The bottom will be here when buying a house to rent out clearly makes money. At that point it's justified to buy because rent can cover the mortgage and all expenses if necessary, eliminating much of the risk. For a rough indication of the wisdom of buying a house, look at the yearly-rent/price ratio for the model of house in question

3% = do not buy
6% = borderline
9% = ok to buy

Guys, do the sums for heaven's ...

Wed, 17 Jun 2009 02:10:00 GMT

Guys, do the sums for heaven's sake - you're saying that a 5% mortgage on a 200K house is better than waiting a year and getting a 7.5% mortgage on the same house, which is now worth 170K.

This is absolutely not the case.

As you suggest, if you're ...

Wed, 17 Jun 2009 02:04:00 GMT

As you suggest, if you're going look at a house as an investment (and all buyers should, to some degree) then you've got to compare it against other investment options. Comparing it only against the rental market, which is itself a variable, has never really made sense to me.

You really need to do both in this market. In normal times with appreciation keeping in line with inflation, it's not as important to look at it as investment unless you plan to be there for a LONG time (that's 20+ years, not 5.)

Did home prices drop from 1970 to 1982 or so with inflation&high interest rates?

No. But then again, prices are flat for the decade and a half preceding it. I think the most epic bubble in the history of the world may have some bearing on how things work out this time.

Again, inflation effects wages and therefore will mitigate home price declines to some extent

During the past year, do you believe that wages have kept pace with inflation? If not, how long would you expect it to take before they catch up?

a 15% cheaper house with a 45% higher interest rate is still a loser. Just depends on what your situation is.
Agreed?

Sure, but not by much. However, I believe that a 45% rise in interest rates over a short period would cause a much larger drop in prices than 15%. And if it's not a short period, you have plenty of time to react.

According to Keynesian economics, it should be impossible to produce inflation during a period of slow growth and high unemployment.

John Maynard Keynes had apparently never heard of a printing press. He also doesn't translate well to an import-based economy where devaluing your currency can nullify any stimulus you are attempting.