rent vs buy - and the "bubble"
say a 2br condo can be had for three quarters of a million bucks, with 33% down. Say 250k can earn 5% (after tax), and a 500k mortgage is 4% (after taking tax-deductions).. then the yearly costs after tax are 32500 plus 5k a year in after-tax monthly dues totals 37500. This is over 3200…
say a 2br condo can be had for three quarters of a million bucks, with 33% down.
Say 250k can earn 5% (after tax), and a 500k mortgage is 4% (after taking tax-deductions)..
then the yearly costs after tax are 32500 plus 5k a year in after-tax monthly dues totals 37500. This is over 3200 a month in real cost. And that assumes nothing breaks.
Say you can rent a garden duplex (larger) in the slope (non-prime) for 3000 a month, on a 2 year lease, and rent is realistically only likely to go up with inflation after that.
And further if you think that house prices are going to stay flat for a couple of years, and you may want to sell – either to trade up or to move around – within 5 years, and selling will incur a transaction cost of at least 5% (35k) (brokers need to eat too).
then is there a reason to buy outside the privilege of substituting a landlord who doesn’t want you screwing up the place but fixes things, for a bank manager who doesn’t care if you screw up his place, but doesn’t fix anything?
is buying an implicit bet that the property will appreciate sufficient to cover the transaction costs?
yes, you don’t buy a house as an investment, but to live in. But if you face a 5% real drop in price (-75k), that translates to more than 25% haircut on that 250k you saved up (after all it should have appreciated 5%).
just food for thought..
did I do some part of the math wrong? is my guess of rent too cheap and condo too expensive? (assume the slope, here).
You sure as hell won’t be makin 650K in Denver.
Enjoy it.
It’s a pit.
People who compare B cities to New York are ignorant fools. You can barely pay someone to buy a house in Denver these days.
My wife and I make 650/yr combined, and happily rent a modest apartment.
We’ve done the calculation, and a buying a house is an implicit bet on some combination of
a) great home price appreciation
b) continued good government
c) continued low interest rates
d) increased inflation
Unless you either really need to own a home or really value the super-high-end finishes that only your own reno/new construction has, it doesn’t make sense.
I’d be happy to buy a home in Denver or some other place where they are priced closer to an amount that the median income can afford.
You’re math is savvy and hard to argue with.
At the same time, historically, literally 100% of those before you who have bought have become rich, and literally 100% of those who have followed this savvy math and rented have become suckers.
I’m not trying to be a jerk. That’s just true.
Moral of the story: there’s a time and a place for spreadsheets, and there’s a time and a place for holding your nose and paying way way way too much in defiance of common sense for something that in all likelihood will be worth even way way way more someday.
Weird but true real estate truisms.
Actually, to clear 6% after transaction fees, mutual fund loads etc. isn’t a given (for any given year, that is). Over time, that’s about right.
Anyway, here’s why short-term home ownership might not make sense:
There are a lot of costs associated with ownership, especially transaction costs to buy/sell. We made what appeared to be a $240k killing on our last co-op but since we only owned it for 3 years, taking every cost into account we actually made $90k free and clear. Our dp was $107k, and if we’d let that money sit for 3 years (and saved at about the rate of $1k a month), it probably wouldn’t have been much of a difference. We also spent money on a renovation.
We bought on the cusp of the bubble (11/03) and sold at a peak (2/07) and barely beat the market. I think that’s because of the transaction costs — on closing alone, we spent nearly 8% of total sales price (broker fee, flip tax etc).
Over a 10 year span, we’d have probably done better.
So in any given 2-year period, given an HONEST accounting of your costs to own, you probably won’t do much better than the market.
THOSE were your conclusions???!!
uhhhhh. ok.
I don’t think you should be buying property, bud.
so the AMT threatens deductions, or not?
Yes, I would not sell in 2 years, but maybe 5.
If property goes down or is flat in absolute terms for 5 years, it is still a losing proposition for me, and any loss is magnified by the leverage implicit in taking a mortgage.
I feel that rents are tied more to real wages than property prices. They can go up faster than inflation but less games can be played by renters: you either earn enough or you don’t. Mortgages are much more tricky as the current mess indicates. So if rents rise really fast it could be a sign of a booming economy.
If house prices fall due to a widespread credit crunch and economic uncertainty then cash is King and I expect banks to offer decent rates for cash in that environment. 5% or 6% is hardly a huge target to hit anyway..
I think my conclusion from this topic is that buying is a taking an optimistic view on gentrification, rather than any win vs renting. The reason park slope values are still higher now than they were a couple of years ago while the rest of the country outside nyc swoons is that the area gets clearly more gentrified every year. That process has a while to run yet. It still doesn’t look like the upper west side, like it or lump it, that is where it is heading. Look at those condos on 4th. They are full of X-gen types who would buy in the east village if they could afford it.
So I think all the people who have made out like bandits from owning over the last 10 years don’t credit gentrification nearly enough. It isn’t smart to own property in nyc, it is smart to own property one train line stop further out than where the money is, because then it comes to you.
A lot of brooklyn is “one stop” out from the money in nyc. And of course the slope is one stop from brooklyn heights, and south slope is one stop from north slope, and so on and so forth.
Wow I have too much time on my hands. I need to do something more productive.
well the rest of the u.s. is a more rational market over time, but still 70% or so people own their homes (i think more like 35% here in nyc).
so it goes to show that even if the OP is correct in a more rational market, it would seem that the decision to own homes is based primarily on things that are not based on the financials only.
In a rational market, OP is correct.
The NYC market gets all kooky, however, because supply often does not equal demand. This creates some serious skewing that favors ownership over time.
You also have to take some of these comments with a grain of salt.
There are a lot of very bitter renters in New York City today…some who have lived here for years and just watched lots of people around them make a ton of money in the last 7 or so years.
They will tell you it is better to rent no matter what…it’s the whole misery loves company attitude.