April 01, 2007
Think twice before buying a house right now A good number of the AE readership has recently or will in the next couple years be finishing up school and heading into the "real world". One thing that often accompanies this is the desire to purchase a house. This article should at least give you pause.
It's somewhat Bay Area-centric, and makes the point that other areas are not necessarily affected in the same way but I think it does do a good job of making you consider the true costs of owning. It's kind of a bummer to read though.
The housing crash is happening throughout the country, too. DC and Miami are other cities that I heard were having trouble. I am not sure that it has affected Austin, yet, since prices around Zilker are still way inflated.
I don't think Austin is crashing right now, partly because it never got as overheated as the coastal markets and partly because a lot of the speculation money has moved from CA to the ATX, inflating prices here.
As someone who has recently done a good bit of research into housing costs, I think it is important to keep in mind this article was written about the Bay area where owning a piece of property is unaffordable for average people. In many places, houses still cost around $200,000 as opposed to the 700,000 quoted in the article. This is at least a three fold difference while your rent may only decrease by two fold. Plus, you probably should look at the market you would be buying into. Are property taxes as high as in California? Did the bubble grow as big, if at all, where you will be bying? Looking at statistics on average home prices for a certain region over time will give you a good idea of the size of the bubble for the area and a better idea of the long term potential of a house as an investment. Sure, maybe now is not the time to invest in Bay area property, but will you really loose money buying a house everywhere? I doubt it since housing markets vary considerably across the country.
FYI: The Economist this week (or last week) has a big article about housing, the bursting housing bubble, and how how much Americans punish themselves by going into tremendous, crushing debt to over-buy dream homes.
Agreed on the variation in markets, but I think some of the points in the article are valid regardless of market.
Stuff like the impact of tighter lending standards should be more of a national thing. Also, in general there are lot of truisms commonly spouted off about buying a house that bear further examination. For instance, the tax benefits of having a mortgage are often touted without looking at the total cost of ownership. Appreciation in house value is often looked at as a total gain without considering the tax increases, maintenance costs, etc.
I also think some of the calculations he goes through are useful for making you consider the total cost.
I'm sure a lot of this stuff isn't news to people who have researched it, but I posted with the thought that a skeptical piece might be a good counterbalance to some of the conventional wisdom out there.
Advice to take from the article: Don't move to CA, especially the Bay Area. Sure the weather is great and there are a lot of wonderful things to do here, but I think that most places are as good as any. Unless you bought a long time ago or work at Google (or other high paying place), home ownership is really out of reach. The poor man and I are trying to figure out how to get out of CA.
/em scratches northern california off the list
The article makes the point that you should compare the costs of renting (a house) with the costs of renting (money to buy a house). You then have to account for the benefits (freedom, pride of ownership, tax relief) and liabilities (insurance, asset risk, repair cost risk, maintenance costs; plus costs of commuting and social capital if the house is farther away).
This costs of ownership calculator lets you figure the true costs of renting v. buying. The big variable here, of course, is the home's appreciation rate. For a 200,000 dollar home with 20,000 down at 6.5% 30-yr mortgage; 25% tax rate and $1800 equivalent rent for 5 years with 8% opportunity costs, 7% cost to sell. I don't know about the other variables. At -5% appreciation ownership is better (by $15k) at -10% renting is better (by $16.7k) over the 5 years.
Also: I browsed craigslist and the uber-annoying rent.com for the $1800 figure. There are sweet centrally located houses for about that, and ridiculous condos as well. The rental market is truly soft.
It appears that the CoO calculator doesn't figure in the advantage of doing something else with the $20k down payment. That seems to be a main point of the article Habcous linked to -- that the down payment may be easily invested in a financial instrument(s) with better yield than a house. For example, a 12mo+ Certificate will bring you 4.889% APR with a $1000 minimum [scroll down], which is probably the easiest and least complicated investment possible. This would have the advantage of low-risk, and quick access to funds if needed. Especially when compared to how long it takes to list, contract, and close a sale of a house. Even if the market is in the seller's favor, this process can take a couple of months to complete.
Wikipedia brings down the stats hammer. Scroll down for "the bubble bench" to see a truly hilarious picture.
javelina, I think it does capture the opportunity cost on the down payment. Some items that I can think of that are missing are maintenance/upkeep and things like HOA dues. Also, the downside of no state income tax.
Actually, I take that back. It does include an "other costs" line that probably covers that stuff.
Bubble Bench (from bubblicious). And yes, the opportunity cost parameter is supposed to account for investing in a balanced/index fund at 8% return, and the "Other monthly house expenses" are expected to account for insurance, HOA fees, and upkeep for maintaining 'a wooden box that sits out in the rain and slowly rots.'
actually, just to second jave's point, the Economist has had articles predicting and then following the nuances of this for over a year now. I mentioned it to one of our friends when he came to visit early in the fall and he laughed at me, but now...
The reason why I am worried about Austin eventually "correcting" is that for years, maybe during the dot.com high years, houses here have been more expensive than in nearby large cities, like Dallas and Houston, as an article in the Statesman demonstrated. They showed what $100k would buy here, in Dallas, in Houston, in Beaumont (a mansion!) and in El Paso. The Austin house was pretty not-awesome, closely followed by the Houston house, but followed.
This strange effect seems to be opposite the usual trend of more expensive housing in very large cities than in mid-size cities. (although perhaps that rule changes when the very large cities have no geographical feature forcing them to be dense.)
Yeah, Houston is basically a suburb of 15 million people.
On a similar note. . I knew a guy once that was a staunch believer in leasing over buying a car. Turns out, it depends on if you're willing to drive a clunker. Short term - lease; long-term - buy.
Buying a car on credit is a terrible idea. Buying a brand-new car is a terrible idea. Replacing your car every few years is a terrible idea.
The right comparison is leasing vs. ownership expenses and the opportunity cost of buying in cash, minus asset replacement after about 8 years. There's little question this will come up significantly to the benefit of buying a car (considering the false comparison above found leasing to be a toss-up).
If you can afford lease payments on a brand-new car, you can afford to buy a comparable slightly used car and a repair plan in cash.
The roller coaster version. Hey it's no Big Bad Wolf, but really, what is?
I don't know, Habcous, both the House Coaster and the Big Bad Wolf were moving at the "Speed of Fright."
I'm prompted to beat the dead horse by a NYT article, featuring cool calculator.
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Maybe it's time to add a Depressing category...
posted by natedogg at 12:20AM CST on April 02