September 24, 2007
This is a bit of an “I-told-you-so” post to the many people who have suggested, in the past few years, that I should buy property. For those of you who have been hiding at the bottom of a well, the news is full of the sub-prime implosion, real estate decline, and continually repeated assertions, mostly by those with a financial incentive in the selling of houses, that we’re just about near the bottom.
We’re nowhere close.
In real terms (say, converted to ounces of gold, or to some stable currency, like $ Canadian), I predict that the price of houses in California will continue to decline for the next three years, at least. Maybe much more.
I assume you’ve seen this chart.
A little while ago, a friend of mine bought a condo here in Santa Barbara. Now, he’s in a different financial situation than I am, so he has some different priorities. At the time, I made a spreadsheet to chart out the financial impact of buying or renting. You can plug in whatever values you want for size of down payment, interest rate, inflation rate, alternate investment rate, house appreciation rate, marginal tax rate, property tax rate, maintenance costs, commission, etc.
I made a few assumptions. When necessary, I tended to err in favor of buying a house.
- You would rent a comparable place to what you would buy. This favors the buyer because generally, you can rent much cheaper than you can buy, if you have to. This gives you more flexibility and enables you to live on the cheap during a period of lower/no income rather than cashing out a 401K because you have to make your mortgage payments.
- You would never sell the house you buy. Favors the buyer because most people move houses every few years. Comissions suck.
- Standard income tax deduction never changes. Mostly because I didn’t feel like researching how it changes. Favors the buyer.
- Renters invest a sizeable percentage of the difference between buying and renting in some other investment. This one definitely favors the renter, human psychology being what it is. Most people are likely to only invest a portion of the difference, and live high off the rest. (Actually, most people aren’t likely to have enough money to buy in the first place, but, obviously, this calculation isn’t about them. They have to rent.) Arguably, the best reason to get a mortgage is that it works as a forced savings plan.
I plugged in some reasonable numbers (3% inflation, 5% housing return, 8% investment return, 10% down, etc.) and prices for Santa Barbara. Bear in mind that 8% is a very conservative return for a stock index, and that, historically, housing has returned less than 2% above inflation.
Want to guess how long it takes for the Owner to outpace the Renter, financially? How’s never strike you? Using the fairly conservative estimates above, with an 80% renter investment rate (and our own rent/estimate of the house we rent’s cost), the renter comes out ahead by 10% at the end of the 30 year mortgage. After that, the renter continues to pull ahead, because his assets are appreciating at a faster rate than the owner’s.
September 11, 2007
Coffee made with Sprite instead of water tastes terrible, by the way.
You may be wondering why I was stupid enough to make coffee with Sprite.
I was not. Linda made it.
I was merely stupid enough to try drinking it.
September 10, 2007
I had this conversation at least twice this weekend.
Me: <witty and/or insightful comment.>
Gina, handing me a tissue: “There’s a thing in your nose.”