[cmeisenzahl]

Fun calculator.

http://www.nytimes.com/2007/04/10/bu...T_GRAPHIC.html

[turtle777]

Very cool

-t

[Zeeb]

Excellent link. The prevailing wisdom has always been that you are throwing your money away if you rent. However, in certain markets if you happen to have cheaper rent--you're throwing your money away if you buy.

[turtle777]

Originally Posted by Zeeb 

Excellent link. The prevailing wisdom has always been that you are throwing your money away if you rent. However, in certain markets if you happen to have cheaper rent--you're throwing your money away if you buy.

Yes, it is VERY much dependent if you can expect the appreciation of your house (in %) to be HIGHER than the rent increase (in %).

In the current markets, that's highly unlikely for the mid-term.

-t

[Eug]

Correct, there is no easy answer.

When I was looking into this a long time ago, I discovered it would take me roughly 3-4 years to break even, with my finances at the time (ie. mortgage ratio and interest rates), and the expected increases in rent and housing prices. Considering at the time I wasn't even sure I would stay there for more than 4 years, it just didn't make much sense to buy.

I did buy later though, back in 2000ish. I'm glad I did, cuz housing prices began to increase enormously after that, on a year-over-year percentage basis. Having that equity (which increased lots in the last few years) made my purchase of a bigger home last year that much easier.

However, I do not agree with Zeeb's contention that having relatively low rents means it makes more sense to rent than buy. If you finances permit it, buying often still make more sense than renting, at least if you want a rental property anywhere near the size what you would actually buy. See above.

[paul w]

In my area the math is very simple. For our money we can get a lot more renting than buying. Besides the fact that the market is still high, the dynamics of the neighborhood are changing rapidly enough to make us not want to invest here longterm.

[Eug]

Where is your area? How high is "high"? Cuz I wonder if some areas are nearing the low points in prices. Maybe not necessarily today, but by next summer anyway.

I do agree with your statement about not wanting to invest in the long term. Yeah if you don't want to live there 3 years down the line, it may not make any sense at all to buy there.

[ort888]

Does this take into account that your typical house is much nicer than your typical apartment? I put my numbers in for my current house and my old apartment... and the graph showed that I would have been better renting. That said, my house is twice as nice as that apartment, and only costs about 50% more a month. If I was to rent an apartment as nice as my house, it would cost much more then my mortgage payment.

Also, when you rent... someone out there owns your property and is making money off of you. These people will always make money. I doubt many landlords are renting at a loss. So doesn't that sorta mean that buying will always make more sense? In the long term anyway? And if you can afford it?

[Dakar the Fourth]

Originally Posted by ort888 

In the long term anyway?

That's the entire point of the thread.

[paul w]

Originally Posted by Eug 

Where is your area? How high is "high"? Cuz I wonder if some areas are nearing the low points in prices. Maybe not necessarily today, but by next summer anyway.

Park Slope, Brooklyn, New York. The land of lovely, highly desired brownstones. They're historic, in short supply and the neighborhood is one of the "nicest" in the country. The demand here is always high, always going up up up.

Of course New York demand is not the same for the rest of the country. There's always questionable development projects aiming to build highrises and tons of condos which upset the balance and character of an area.

[Eug]

Originally Posted by ort888 

Does this take into account that your typical house is much nicer than your typical apartment? I put my numbers in for my current house and my old apartment... and the graph showed that I would have been better renting. That said, my house is twice as nice as that apartment, and only costs about 50% more a month. If I was to rent an apartment as nice as my house, it would cost much more then my mortgage payment.

That graph can be varied to however you like it. I sort of alluded to what you said earlier. If you want a big house, you're often going to pay through the nose for rent. However, many renters will save money simply by renting a smaller place as you say. Makes sense. OTOH, if you want to buy, you may be inclined to buy a nicer place, and more room for say your future 2 kids. That's fine, as long as you can afford it.

Also, when you rent... someone out there owns your property and is making money off of you. These people will always make money. I doubt many landlords are renting at a loss. So doesn't that sorta mean that buying will always make more sense? In the long term anyway? And if you can afford it?

Not really, because housing market fluctuations, maintenance, ongoing utility cost, etc. as well as mortgage costs can really get you. This is especially true in areas with significant numbers of dead-beat renters, or if there is glut of rental space meaning your place may sit empty many months of the year. Then there's also the hassle factor. Do you really want to put in the time as a landlord? You can pay someone to do it, but many of the companies that do this will charge you one month's rent or more, and that doesn't even cover any maintenance costs.

[Jawbone54]

Liberals rent.
Conservatives buy.
Let's see how inflammatory that statement can be...
Muah ha!

[Dakar the Fourth]

We're all renting, this is God's world.
Eat it, EAT IT!!! It tastes good, doesn't it?!
MMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMMM

[Eug]

Here's the article associated with that calculator.

Economic Scene - As Home Prices Drop Low Enough, a Committed Renter Decides to Buy - NYTimes.com

All this time, I have been a renter myself, first in the New York suburbs and then in Manhattan. But my wife and I will be moving to Washington this summer. And the housing market has, obviously, changed quite a bit since our last move, in 2005. Nationwide, prices fell 14.1 percent from early 2007 to early this year, as Standard & Poor’s reported Tuesday. Home prices almost certainly still have a way to fall, but they’re now well below their peak.

So my wife and I began our search with open minds, willing to consider renting or buying. We ended our search by signing a contract to buy a house.

This is the story of my conversion.

He claims that a rent ratio of under 20 is sufficient to justify buying.



The rent ratio is defined as sale price vs. annual rent. What he states sounds reasonable, except that it'd be very difficult to find a house for rent directly comparable to what I bought, in a location where I'd want it.

Anyways, here in Toronto, I would guess that the current ratio is in the low 20s.

[Jawbone54]

Originally Posted by Dakar the Fourth 

We're all renting, this is God's world.

I'm impressed. Your newfound spiritual wisdom has come so far in such little time. May God bless you on your journey.
It was only a matter of time before you saw the light, brother.

Now shave your head, pick up your hooded robe, and find yourself a few underage wives so you can come live with "us" on our ranch.

[Zeeb]

Originally Posted by ort888 

Does this take into account that your typical house is much nicer than your typical apartment? I put my numbers in for my current house and my old apartment... and the graph showed that I would have been better renting. That said, my house is twice as nice as that apartment, and only costs about 50% more a month. If I was to rent an apartment as nice as my house, it would cost much more then my mortgage payment.

Also, when you rent... someone out there owns your property and is making money off of you. These people will always make money. I doubt many landlords are renting at a loss. So doesn't that sorta mean that buying will always make more sense? In the long term anyway? And if you can afford it?

I happen to live in an apartment in Brooklyn and pay $675 a month. In order to buy the same amount of space in this neighborhood would run me about $750,000 or more. My rent payment is far below just the interest portion of the mortgage I would have to take out to buy and that doesn't take into account ultra high maintanance charges and NYC taxes--lets not go there. I think most definately I'm saving a boatload short and long term by renting. My situation is not typical however.

My landlord is making money on my rent each month and I don't have a problem with it at all. Most mortgage companies would make at least twice that much each month off people that "buy" property. If your house is paid off by the time you're ready for the old folks home you'll be lucky.

I concede that one thing I don't have is security. The landlord can raise the rent, not renew the lease, etc. However, I'll ride this donkey as far as it will take me.

[Randman]

Squat.

[paul w]

Originally Posted by Zeeb 

I happen to live in an apartment in Brooklyn and pay $675 a month. In order to buy the same amount of space in this neighborhood would run me about $750,000 or more. My situation is not typical however.

That's insanely cheap.

[olePigeon]

I pay $1610/month for a 2 bedroom apartment. A 3 bedroom, common-wall townhouse is around $700,000. You can find them as low as $350,000 if you're willing to put padlocks on your doors and bar your windows.

[mindwaves]

I don't currently rent nor own, but I'm hoping to buy a house within the next 6 months or so. Rent in the area which I would like to live would approximately be about $1600 for a 2 bedroom place. Mortgage for a 2-3bedroom/2bath home in a fairly decent place would be about $2,600 a month with excellent credit which I have (in addition to 20% down). I plan on renting 1-2 bedrooms out for about $500 a month each such that I would be paying rent prices for a house.

Renting 1-2 bedrooms out IMO would not be terribly hard since it is in a college town. Finding decent tenants would be more difficult however.

[Mithras]

Originally Posted by paul w 

Originally Posted by Zeeb

I happen to live in an apartment in Brooklyn and pay $675 a month.

That's insanely cheap.

Was going to say the same thing. Are you out in Canarsie in someone's basement laundry room or something?
We're contemplating moving from my grad school apartment to Fort Greene, and we're looking at $2000 bare minimum for a one bedroom. Or, scraping together money to buy a ~$650,000 apartment somewhere.

[Eug]

Hmmm... Is the US capital gains exclusion on homes really limited to $250000 (or $500000 for a couple)?

If so, that kinda sucks. You guys get the benefit of deducting mortgage interest, but here 100% of the value of the house is exempt from capital gains, if the house is the one you actually live in. So, that would change the assumed variables of that NYT calculator for us.

$250000 may seem like a lot, but if your house is say $750000+ to begin with (like the houses some are discussing here), it really isn't that much, especially when $750000 is a trough in the pricing curve of homes over time in your area. $250000 would mean 1/3rd of the value of the home, which isn't a lot if you plan on keeping the house a long time. I guess the lesson is you're much better off being part of a couple when buying a high value home in the US.

[Zeeb]

Originally Posted by Mithras 

Was going to say the same thing. Are you out in Canarsie in someone's basement laundry room or something?
We're contemplating moving from my grad school apartment to Fort Greene, and we're looking at $2000 bare minimum for a one bedroom. Or, scraping together money to buy a ~$650,000 apartment somewhere.

I live in the Northern edge of Park Slope close to Atlantic Center in an old but nice brownstone--above ground. I've lived in my apartment for 10 years and got in while my part of the neighborhood was undesirable. I still can't believe the change that has taken place. Originally, the only reason I moved there was because I would be close to a lot of subway lines--and couldn't afford Manhattan anymore. I would always go into the city to eat out, shop, etc because almost everything around me was boarded up or burnt out. Now, the real estate along 5th ave and even 4th is prime and filled with nice restaurants, stores and clubs.

$650,000 should get you a nice place in Fort Greene. Personally, I would rather take that money and buy a much nicer place in another vibrant city. Condos down the street from me are going for $900,000 for a two bedroom. Even if I had that kind of money I would not pay *that* much to live here. I love Brooklyn but that could buy a huge house with a pool on a beautiful wooded lot in some places. The day I lose my rent situation is the day I put in my resignation at my job and move. I just can't see myself paying current market rates for a cramped apartment

I think its great that neighborhoods are being revitalized but its sad in a way. A lot of the people I knew when I moved in are long gone because of the prices. It's a shame that gentrification can't be made to actually benefit the people who already live there--rather than force them out.

[Eug]

Originally Posted by Zeeb 

I think its great that neighborhoods are being revitalized but its sad in a way. A lot of the people I knew when I moved in are long gone because of the prices. It's a shame that gentrification can't be made to actually benefit the people who already live there--rather than force them out.

?

If they already bought there, why would you be forced out? Or are you talking about renters? Cuz when I moved into my brownstone, the area was only somewhat gentrified, and by the time moved out it was hugely gentrified. It was of great benefit to me because I got a great price for my unit when I sold, and it remains of great benefit to my ex-neighbours, because they got in to a now very popular part of the city when the price was low, and are well on their way to paying off their mortgages.

If you are talking about renters, then all I can say is that's one of the advantages of buying. However, it can work the other way as well of course. If your neighbourhood goes down the drain and your property values drop significantly, then you're stuck with a mortgage on a house that isn't worth it. We already know of one person here that was in that situation in Florida.

---

BTW, many keep saying that home prices will continue to drop for a little while. That may or may not be true, but it's interesting to note that some are also saying that interest rates are set to increase slightly in the US soon too. I guess we'll have to see the numbers before we can really judge (in retrospect), but what's better, higher interest rates with a slightly lower price, or lower interest rates with a slightly higher price?

Out of interest's sake, what kind of mortgages seem to be most popular around where you are? Around here, the preference seems to be a 5-year fixed-rate mortgage, amortized over say 25 years for a new purchase. 40-year amortization periods are becoming more popular though, since the house prices are going so high. (House price increases have slowed here, but are still in the 5% year-over-year range, in contrast to the double-digit gains in previous years. Part of the reason of the slowing is the high price, but another part of the reason is a new idiotic land transfer tax that might add say $10000-25000 to an up-front home purchase cost depending on the price of the home. That 5-digit amount now can't go into the down payment.)

[Mithras]

Rising assessments, and hence real estate taxes, can be another factor that pushes out long-time (homeowner) residents. Though in New York they're reasonably well politicized to make it a little less likely to rise precipitously.

[Eug]

Originally Posted by Mithras 

Rising assessments, and hence real estate taxes, can be another factor that pushes out long-time (homeowner) residents. Though in New York they're reasonably well politicized to make it a little less likely to rise precipitously.

True and true.

However, if a property tax increase from say $4000 to $5000 over 5 years means you can no longer afford your home, it could mean you were overleveraged to begin with. $125 extra per month isn't chump change to be sure, but then again it's not a huge amount of money either, especially if you're in a home expensive enough to justify a $5000 property tax bill.

Of course, it does depend upon the numbers a lot though. Around here, a $5000 property tax means a house assessed at $586274.

I think the biggest problem here is the retired elderly home owner with a fixed income, who bought their home decades ago. Increasing property value assessments can have a dramatic effect on their situations. However, I don't think it should be a problem a younger person with a steady job and a relatively new mortgage, even though it can be. For such a person, there should ideally be sufficient cushion in his/her budget to account for that. If there isn't, then perhaps that person didn't necessarily plan things well.

My approach to a mortgage has been to calculate the limit of what I think I can pay, and then decrease that number by a certain amount for my real baseline monthly payments. I then increase my monthly payments to more than my mortgage baseline requires, and also if possible, save extra for lump sum payments.

I'm making up numbers, but say Jessie Hermaphrodite can realistically pay $2000 a month. Then s/he should try to purchase a home with monthly mortgage payments of $1750 a month, but use the 15% extra-pay option of the mortgage to pay $1955 per month. If Jessie runs into trouble, the mortgage payment can reduced back down to $1750 with impunity. Meanwhile, if there is extra cash (including that remaining $45 per month), this can be accumulated in a high interest savings account, either to supplement the buffer emergency fund (which everyone should have), or (if the emergency fund is already sufficient) can be saved for a lump sum payment.

The problem with this is that it takes discipline. Too many people will take that extra $250/month saved and spend it on toys. I am also assuming that 15% extra per payment and additional yearly lump sum payments are normally allowed for US mortgages. They are the norm here in Canada, unless you're talking about some 3rd tier mortgage company with high rates and super-restrictive rules. However, IMO if you fall into that category, you may be better off renting.

[Eug]

Some calculations:

House: $600000
Downpayment: 20% = $120000
Mortgage: $480000

Mortgage Calculator -- Bankrate.com

At say a 5% interest rate, the monthly payments would be $2806.03 with a fixed-rate 5-year mortgage amortized over 25 years. Let's assume that's exactly what you can afford to pay.

Under Eug's strategy, you'd change it so you're paying more like $2500 a month as your baseline.
ie. If you amortize that same mortgage over 32 years, you get payments of $2508.05.

So, you see that is now 32 years. Ouch. Too long. But then you increase your monthly payments by $300 (12%), back up to $2808.05, which changes your real payment period back down to 25 years. However, if you ever run into trouble, you can just tell the bank to dial it back down to $2508.05, without having to go through some long and stressful renegotiation process.

But what if you want to pay it back faster? Well you can still do that, because you still have additional yearly lump sum payments you can make, and you can even increase your monthly payments further.

[Eug]

Interesting take on this at CNN.com.

Man pays $30K in rent, faces eviction - CNN.com

Charles Nelson has paid about $30,000 in rent since moving into a spacious four-bedroom home in August. He was stunned when a real estate agent knocked on his door recently and said the home was in foreclosure.

His landlord had not paid the mortgage since he moved in and the bank is now demanding the house back. Nelson will also lose his $7,700 security deposit.

It seems to me he paid 2 months rent for his $7700 security deposit, and also paid $3850 per month in rent.

A quick look on Yahoo says that houses with 4 bedrooms in that area start at $500000, and go up into the several millions. I don't know how big a house he rented, but whatever the case it sounds like an expensive area.

I guess this is the speculator effect happening. Even with $3850 a month in rent, the owner couldn't stay afloat. Perhaps his teaser rates expired, and he couldn't sell in a depressed property market, and decided to walk away. My understanding is that since the peak, there has been an average drop of 24% in Los Angeles/Orange County, and some homes in that area dropped a whopping third.



Even if the owner had put down a 10% down payment and collected $38000 in rent and a security deposit, he'd still be in the hole, on say a 680000 home purchased at peak. He might still owe close to say $600000 on a house that would now sell for $520000.

So, the renter gets fracked.

[Zeeb]

That's an awful story. It's amazing to me that a building owner can continue to charge rent knowing that his house is going into forclosure. These people are intensly self-centered as are many of those who decide to walk away from mortages not always because they can't afford the payments but because it suits them -- without a second thought about how their decision affects others or the economy.

It didn't mention in this story whether the owner defaulted because he/she couldn't afford the payments. It could be that the house was worth less than the loan and so he decided to default. Of course, he continued to charge rent and not tell the renters because that suited him as well. That'll give him a little extra cash that he can use to defraud his next victim.

With all the credit checks that potential renters are put through I've never heard of a service that does the same for the building owner.

[Eug]

Ouch, on local pricing: globeandmail.com: On the hunt for an affordable detached home

Yes, affordability is a growing concern. The average price of a new single detached house in Toronto proper topped $1-million in the first three months of 2008 — $1,002,534 to be exact, according to CMHC. (It should be noted that this includes lavish custom houses built for high-end buyers, which skews the average-price data.)

Rents here have gone very high here too. However, it's interesting to note that rent increases have not been as marked as purchase price increases. One key factor though is the enormous amount of condos built of late. People are buying in droves downtown and not too far away, to avoid the uber long commutes and high rents. These are also what people are renting out these days.

Of the 5,141 housing starts under way in Toronto in the first three months of 2008, 4,669 were condominium suites, followed by 268 townhouses, 76 semis and 128 detached houses, according to data collected by Canada Mortgage and Housing Corp. (CMHC).

[DeathToWindows]

I currently rent, as I've just moved to Nashville (where I expect to be for the next two years, prior to going to graduate school). Didn't make any sense to even think about buying...

[mindwaves]

Originally Posted by Eug 

So compared to 2002, homes are still very very expensive.

[turtle777]

So, will the Canadian housing bubble burst next ?

-t

[TheWOAT]

At my cousins place where he rents, the owner of the home stopped making his house payments, and notified my cousins. He could have continued to rake in rent but he decided to do the right thing. My cousins stopped paying rent and continued living there for 6 months. The bank came by and offered them $1200 to move out by a certain date. What the bank didnt know was that my cousins had already moved out, and were just hanging out at the house at the time. So they got $1200, plus about 6 months rent free.

[paul w]

That rules. Our landlord is old. All of us in the building are a little concerned about that. Sigh...

[TheWOAT]

Im not condoning it, but its nice to see someone stick it to Bank of America.

[Eug]

Originally Posted by mindwaves 

So compared to 2002, homes are still very very expensive.

Yes, depending on the area. However, I wouldn't necessarily count on the prices dropping to 2002 levels though. At worse IMO they'll bottom out below inflation adjusted 2002 levels, but I'm guessing they'll actually bottom out higher than that (on average). (Inflation since 2002 is about 15% I believe.)

To put it another way, prices are currently around 15% below peak on average in large centers in the US, which is similar to 2004 Q4 prices, which in turn is 60% higher than prices in 2000.

Originally Posted by turtle777 

So, will the Canadian housing bubble burst next ?

It's something to be concerned about if you're thinking about buying here, especially since pricing dropped (-1.7% yoy) compared to last year in places like Alberta. See here: CREA

However, Alberta had an unusually fast runup as well, because they are the centre of the oil boom. People got really, really rich, really, really quickly. It was so bad that Starbucks and stores like that were offering scholarships and stuff so people would work there. Crazy. However, it's interesting to note that the neighbouring Saskatchewan has increased 44.5% yoy , mainly because people are moving out of Alberta to go to the much, much cheaper Saskatchewan, which happens to also be awash in oil. Even after the Alberta price drop and the ginormous Saskatchewan price increase, average pricing in AB is 49% higher than in SK.

Another crazy market is Vancouver. In some of the nicer areas, bungalows go for a million bux. Vancouver was traditionally very expensive, but now it's just outrageous. This 2000 sq ft. house in Vancouver went for over $1.1 mil.



However, prices there are still increasing (10.7% yoy). It's stuff like this which has caused the new 40-year amortization period for a mortgage to become more popular than before. (Previously, banks didn't offer mortgages with amortization periods over 25 years.)

Toronto (where I live) has also traditionally been very expensive, and prices have seen significant increases here too. However, the increases here have been more gradual (+4.8% yoy), and thus some of the analysts believe if that the prices eventually do drop, it will likewise be more gradual.

The biggest risk in many cities here is for the condo market, since that is more speculator heavy than the detached home market. OTOH, the condo market has a good reason to be popular, because it's the most affordable. All I can say is I'm happy that condo market increased faster, because it was great for me when I sold my condo last year.

Very few predict anything like the US crash though. We discussed this in the other thread way back, but the key factors are lending practices by the banks and borrowing practices by the home buyers.

1) Canadians are traditionally much more conservative in how they borrow. The most popular type of mortgage still is the 5-year fixed-rate mortgage. (That's what I have, BTW.) Variable rate mortgages are less popular.

2) The subprime market is much smaller in Canada, because most of the lenders are much less willing to dabble in it. 100% mortgages and interest-only mortgages are very rare.

3) The vast majority of higher ratio mortgages are insured. Higher ratio would mean something like 10% down on a $200000 condo, or 25% down on a $1 million house. They'd usually want 20% and 35% down respectively for mortgages without insurance.

4) Banks here are much more likely to keep their own mortgages in their own portfolio, instead of packaging them up and selling them as asset backed commercial paper. So, there's more incentive for the original lenders to make sure these mortgages don't default.

So despite the high prices here in Canada at the moment, foreclosure rates still at historic lows from what I understand.

[Eug]

Originally Posted by cmeisenzahl 

Fun calculator.

http://www.nytimes.com/2007/04/10/bu...T_GRAPHIC.html

Hmmm... It now wants a (free) registration.

Bugmenot.com - login with these free web passwords to bypass compulsory registration

[Eug]

Carson sidekick Ed McMahon fighting foreclosure on Beverly Hills home