The premise that buying is always better than renting is just plain wrong in the first place

[Phoebe Loosinhouse]

I know, I know, "The American Dream" and all. To have your own home is grand - you can paint it and landscape it and change it and love it and cocoon in it and grow roots in it and be in control of it.

But, you should own your home - your home should not own you. You should not shovel more than 30% of your income into it's gaping maw. Buy what you can truly afford. I simply cannot understand how suddenly every house in many places seems to be between 250 and 500K. So now, most Americans can afford housing for 1/4 to 1/2 MILLION dollars on their relatively puny stagnant wages? I think not. America has been in the throes of a massive group hallucination as to what really constitutes "affordable housing". Americans are also more than ready willing and able to spend ghost dollars of future income in equity lines and credit cards to hold up the ghost American "consumer economy" which exists solely of people spending money they do not have on things they do not need.

Anyway, back to own vs, rent. Real estate is not liquid and readily convertable to cash like a stock or a bond is. Real estate may tie people down and limit their choices if they want to be mobile, flexible and have the ability to move where the jobs are. The tax advantages of mortgage interest will be offset somewhat by property taxes, insurance and maintenance.

I personally am quite cranky about the fact that our cities and towns try to exist almost solely on property taxes. I would be happy to trade away mortgage interest deductions if we could find another way to finance our local governments. Why not have a state "resident" tax that is apportioned out according to population figures? (Yes, I know that property taxes filter down to renters because owners have to allot for them when determining rent values - but it's a meandering and inefficient way to spread the tax burden around.)

Buying is just not ALWAYS the right choice. But, what all Americans should be concerned about is that we all have access to affordable, decent shelter, whether it consists of rental housing or home ownership.

So, up for debate -rent vs. own, mortgage interest deduction, property taxes Any thoughts?

[GeorgeGist]

1. Thanks for debunking ...

what no sane person believes.

[MindPilot]

2. There are many factors outside the pure financial considerations

For me, renting is simply not viable. I have dogs so I need a yard, my hobbies require a garage/shop, I've worked long and hard to be able to enjoy sitting out on my private patio. So if I were willing to give up all that and move into an apartment, then yeah I could rent. Rent a house? That's just silly; why would I want to pay someone else's mortgage? That's what you are doing when you rent a house.

And in my area, the cost of a decent two bedroom apartment is not too far from my mortgage payment.

[Uben]

6. You should know

....there is a lot more to homeownership than house payments. Taxes, rising insurance rates, and costly repairs can devastate someone living on a margin. Renting certainly does have advantages. It provides housing without the unknowns, and provides for those whose jobs may not be long term or on solid ground. As you know, one can go bankrupt investing in a property only to have prices plummet like they are doing today! Look at the turmoil it has created. I bought my first house in 1980 for $40,000 and sold it in 1995 for $42,000. I basically paid interest for 15 yrs without accumulating equity. It can and does happen! Along he way, I paid taxes and insurance and repairs. I would have been able to save more money if I had rented the same home.

[MindPilot]

11. Yes, but given that a majority of the payment is interest

and that plus the property taxes are deducible, I think there is a financial advantage to owning. I bought a place in 88 for $82k, and sold it in '96 for $92k. To rent that house would have cost roughly the same per month, I still would have to buy insurance (the owner's policy would not have covered my stuff) so I'm guessing that it's pretty close to break-even money wise.

Yes, repairs and maintenance can be killers, but I like to do that stuff myself anyway. Agreed, homeownership is not for everyone, but to me renting is just--as I said--paying someone else's mortgage. As a real estate person yourself, no doubt lots of people have done the same for you which is why you were able to retire at 45.

On edit: And there is that little fact that both times I have rented houses, after a year or so the owners decide to sell so I was faced with an involuntary move. So there is the secuity issue. There is also that period I had to live in a home "show ready". Not only was I paying someone else's mortage for a couple years, then I had to help sell the thing. Factor in the cost of moving when it wasn't planned and I think you'll come out ahead owning.

[raccoon]

17. Right, you can't compare a rental payment to a mortgage payment.

It's comparing apples to oranges.

As you said, there are so many other costs involved when you own.

[Uben]

3. I agree with you

Lots of folks just do not make enough money to own a home, although there are lenders who will tell them they do. When I took real estate classes back in the eighties, we were taught you "qualified" applicants by assessing that their house payment would be no more than 25% of their take home pay. That was the line. Why and when it changed, I do not know.

That said, I have made a lot of money investing in real estate, both commercial and residential. Coincidentally, the only new home I have bought (back in 1980), is the worst investment I have made! I invest in rental properties and apartment complexes, and was able to retire at age 45. I say retire, but I still do some work from time to time on some of the properties, preparing them for lease.

Real estate has traditionally returned a solid 8%, which aint bad in today's market. But, if you cannot afford to own a home, don't gamble! A lot of people can't even afford to rent! I qualify applicants on lease applications to the same 25% benchmark.
If they can't afford it, I do not rent or lease to them. It is for their benefit as much as mine. They do not want an eviction on their rental history, and I do not want a tenant that cannot make payments.

[Mayberry Machiavelli]

4. It's all about the bubble. A lot of the people willing to spend 70-80 percent of their take home on

mortgage payments in the hottest areas did so because of confidence that it would increase in value so despite the hardship, it was a good INVESTMENT. Many or most of these people would not have done so simply for the pleasure of living in a great city, they could do that cheaper with rent.

Once the confidence that the price will no longer spiral ever skyward, much fewer people will be willing to go into that kind of debt for an investment with shaky prospects.

[Phoebe Loosinhouse]

8. And now time for the bubble bath!

I attribute the latest insanity to the tanking of the stock market in 2000 and the Enron debacle which shook peoples confidence in the underlying stability of the stock market. If tech was a sham and overvalued and all those smart people kept saying buy!buy!buy! and Enron, a giant American company was a sham - what is "safe"? Why, real estate of course!

All the would-be investors and flippers entered and flooded the market and drove up demand. The financing for investment property became way too loose and relied on the appreciation of the flip to make any sense. Rehap and flipping is a form of real estate investment, but fraught with more hazards than the old time concept of buy and hold, have someone else pay your mortgage and at some time in the future have a nice equity egg built on your real estate investments.

So far the media has seemed focused on the principle resident folks with crummy mortgages - I haven't heard too much about the foreclosures on "investment" rehabs, but that's going to hurt the values as well. I don't personally have much sympathy for the flip people - they understood it was risky when they went in. I wonder if those mortgages were folded into the CDO's and how they were rated?

[sendero]

9. Houses are like stocks in this regard...

... by the time the "little guy" is making a play the game is already over.

All con games depend on the greed of the mark. Folks who bought houses on spec have just been conned, but they have no one to blame but themselves.

[DrDan]

5. well . .

first - isn't the property tax approach to financing local governments simply a pragmatic one? Home ownership is tracked . . . and the value of that property correctly correlates to individual income - for the most part. So this becomes a fairly simple means by which local taxes can be apportioned. I would certainly be concerned that to simply tax "residents" would offer vast opportunities for non-collection. I suppose a viable national ID program would make this possible, but that is decades away.

Of course "buying" is not always the correct option for everyone. But I would suggest that anyone staying out of real estate for past couple of decades has missed out on some personal estate growth. (I have nothing to substantiate this claim short of personal experience.)

But as you say - there are lots of personal considerations that should be quantified and analyzed.

I also am concerned that the continue growth in home prices coupled with stagnant wages is putting home-ownership our of the reach of many. I would hate to see a country where only the weathly can own a home. But like most current issues, greed is probably at the heart of this. There is just too much money involved and everyone wants more - real estate agents, home owners, banks, mortgage companies, insurance companies . . .

and real estate is a limited resource - there is only so much.

[On the Road]

15. An Alternate Way of Collecting Local Taxes

is through a piggyback on state income taxes. Or in some cases on sales tax, although that only works for larger entities and may affect retail.

I'm not opposed to property taxes, but they are excessive in some areas. A year or two ago, I visited a friend in Princeton, NJ, who was renting a moderately-sized colonial within walking distance of downtown. She said that the owners were probably paying about $30,000 per year just on property tax. That IMO is excessive.

[Phoebe Loosinhouse]

18. I think that must be a mistake.

No moderately sized colonial anywhere would generate that kind of tax a year. If that's what the owners were paing in tax what could she possibly be renting it for?

Is this some unique, expensive, property on lots of land, perhaps zoned commercial or something that would make these figures more understandable? I think your friend just mispoke or else the people in Princtone New Jersey are in a world of hurt.

[sendero]

7. I agree...

... and lots of folks are about to learn again that "conventional wisdom" is not always particularly wise.

[hobbit709]

10. Our house payments are $516/mo

In 1990 when we bought it, the payments were $372/mo. At the time we wre paying $300/mo in rent. Taxes and insurance skyrocketed. I can guarantee you that in this area we couldn't rent a house for anywhere near that. Most rents for houses in this area start at $750. We have six dogs, try renting with that. I run a computer repair business out of half my garage, which I converted to a workshop. The tax assessor says our house is worth $110K, but even if we wanted to sell, the average price in Austin is $160K- so we'd be short. We have 7 years left on this mortgage. We don't even take the deductions because with the standard deduction on our 1040, we come out about $3500 ahead compared to itemizing and it's a lot less hassle to fill out.

[Phoebe Loosinhouse]

12. Yes, it's worked out well for you because of many factors

You bought initially something that you could afford, and then you did not participate in the mass hysteria and buy something you could not afford, nor did you apparently take out equity lines in order to "eat" your house in order to purchase plasma TVs and take Carnival Cruises because "you deserve it". (Of course I'm just making that part up since I don't know you. Maybe you have a plasma TV and do take Carnival Cruises, but you aren't using your house to pay for it)

You also did debunk the mortgage interest benefit - in many cases, like your own, a standard deduction may work out better. This is the case with people with smaller mortgages and hence smaller deductions.

Home ownership is probably the preferred instance if:
you buy what you can afford
you don't eat your equity
you plan to live in the same place for at least 5-7 years if not more.

It's just not ALWAYS the best plan which is what I was trying to say in the OP.

[hobbit709]

14. We bought the house as a place to live

We were tired of renting and wanted a home. Most of our friends did the same in the 80's and early 90's. None of us were buying houses as an "investment". Whenever one of the equity clowns call and try to get us to go further in debt-my response is that it will be a cold day in hell. We also lucked out when we bought the house, there was a 3 week delay in the paperwork and in that time interest dropped over 2 points. So we ended up with a 25 year mortgage at 7.5%

[MindPilot]

13. And even if you could rent a house with adequate dog & work space

nothing will ever change the fact that you are essentially a guest in someone else's home; it can never be comfortable.

[raccoon]

16. Amen to that! It's not a one-size-fits-all decision.

I think whether or not to buy a house is as much an emotional decision as a financial one, maybe more so.

"I personally am quite cranky about the fact that our cities and towns try to exist almost solely on property taxes. "

In my neck of the woods, we have sales taxes. And local option sales taxes. And accomodations taxes.