We all know it's the American Dream to own a home. Ever since WWII ended and millions of US Servicemen came home, got married and found a place to live, the ideal situation was that they'd buy a small home to raise that family. NorthEast builders came up with the idea of "developments" and places like Levit town were born, where thousands upon thousands of smallish homes were built on 50 by 100 lots. It was the first "housing boom." Well, the tradition of owning one's home runs deep in our psyches, but the question becomes this: Is buying a house in this particular day and age really wiser than renting? Don't laugh, you might be surprised at the answer.
There are two particularly attractive reasons to own your own home. One is that it might appreciate in value and your "net worth" becomes greater. The other is that you can write off the interest payments and the taxes that you pay your municipalities. Okay, those are definite pluses. On top of that you get to make the house the way you want it. If you want to punch a hole in the wall, you do it. There is a lot to be said for the personal freedom of doing what you want.
On the other hand, a house is just as much a liability as it is an asset. Each month the mortgage is coming in, the taxes are going up, you have to insure it, and then there are repairs to consider. But, much more importantly, we have to consider the "timing" issue involved in housing. What do I mean by that? Well we've seen an incredible rise in housing over the past three years, spurred by low interest rates, looser standards and of course the stock market melt down of 2000 - 2002.
Let's suppose you were to buy your average 250K dollar home up in the North East. ( or you just happen to already own one) Let's suppose you put down 10% and mortgaged the rest. Okay, so you coughed up 25 grand, and are mortgaging 225 grand at 5.5%. Your mortgage payment is 1,327 dollars a month for 30 years. Toss about 5 grand worth of taxes on top of that, and you are probably at 1700 per month. If you were to hold that mortgage for all 30 years, you would pay 234,906 dollars in interest.
What did you get for your 234K in interest rates? Well you got to write down your income taxes. But you don't get 234 grand "back" you just don't have to pay taxes on the income that would amount to 234 grand. (over the life of the loan) If you held that house for 30 years, how much do you think you put in it for repairs? New appliances, hot water heaters, two roofs, repave the driveway, cut the lawn, removed trees, replaced the windows, etc etc etc? A ton. No one can even put a price on it. But, for our little exercise let's just say that in 30 years you paid 30 grand in repairs. So, we've paid 264K above the homes 250 K dollar price tag. Oops. Taxes. Lets say that your property taxes are 5 grand a year. In 30 years, guess what? There's another 150K dollars. Insurance? Say 500 a year, there's 15 more grand. Water and sewer? Another 10 to 12 grand.
Without going silly, we see that a 250K dollar house is going to cost us about 664,000 when we finally light that last mortgage payment on fire. So, even if the house doubles in price and "then some" , and you can sell it for that amount, you didn't "make" a penny did you? Nope. The only way you make out on this scenario is if it's worth more than 664K grand 30 years from now. But we have a problem don't we? What's that? Well if a house is 250K right this second, and interest rates are at 40 year lows, you can bet that the house is already as expensive as it's ever been. Are interest rates going to be below 5.5% in 30 years? Probably not ( although we have no idea) In other words, who's to say that housing is going to double in 30 years? No one knows, it's a gamble. But worse..even if you sell it for 664K grand, you still have to live somewhere. Not only didn't you actually make any money, you have to move somewhere and pay money there too.
The fact of the matter is that real estate has been a tremendous performer, but I tend to think it's run it's course. Would I be against someone selling at the present, taking their huge profits and renting for a few years just to see if housing falls? Not at all. In fact, if you read these numbers over and over, it might just sway you to consider it. There is no doubt that sometime in 05 rates are going up. When rates go up, prices fall, but this time it's even going to be worse. So many people are going to be trapped because of refinancing that they are going to "walk away". Foreclosures will soar. It could get ugly.
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