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Did You Rent Instead of Buy? Glad You Did?

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A recent article on Wall Street Journal talks about how some people are glad they rented instead of bought because of the recent housing slowdown. What I want to know is why timing the housing market is okay, but timing the stock market is the greatest sin in all of personal finance (it’s not, but sometimes people make it seem that way). The argument against market timing in the stock market is that the market is random, that it trends upward, and your horizon should be far enough away to handle any hiccups. The idea is that with it being random, trying to sell at peaks, buy at valleys, and all that mumbo jumbo is a losing proposition, especially after fees.

Real Estate Timing!

So why is timing in the real estate market any different? The prices aren’t random and don’t move quite so much, but they’re difficult to predict. Here in my neighborhood, five houses have sold in the last twelve months (of the six listed) and each sold within a week to two weeks of being listed. Each sold for about 7%-10% than what I bought my house for two years ago, which shows some year over year growth (not the crazy growth of a few years ago, but healthy reasonable growth). The lone house that sat wanted a good 20% more, which was clearly over-priced. If you waited to buy a house in this neighborhood, it wouldn’t have mattered.

However, in the city, where newly renovated rowhomes and brand new condos were being build and listed with ridiculous prices; those prices sank like a rock. Homes that were once listed around $500k are now at $400k. The only difference was that those homes were newer, being purchased by people with more money than ability to recognize value, but the same geographic area (Baltimore, MD). So, why did those fall more than other areas? Who knows. It’s difficult to predict when supply will outpace demand.

I’d Probably Be Renting

That being said, I hate unyielding adherence to conventional wisdom (which says you should always buy and not rent because rent is throwing away money). Conventional wisdom works if you’re conventional, except most people aren’t conventional and even if they are conventional, they’re usually not in a conventional environment. If I didn’t own a house, I’d probably be renting right now only because I don’t like putting myself into long term relationships (mortgage) in an uncertain environment (housing).

What about you? Renter? Buyer? Glad you did either? What are your future plans?

{ 44 comments, please add your thoughts now! }

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44 Responses to “Did You Rent Instead of Buy? Glad You Did?”

  1. saladdin says:

    Howie,
    To you that may be a simple answer but some “renting” people can still be ahead in the end money wise. After you pay 2 to 3 times what you borrowed for your house, plus property tax, plus insurance, plus up-keep and they invested the difference.

    I can understand the emotional arguement of wanting to own your home but math wise it is a much harder sell.

    saladdin

  2. Llama Money says:

    I bought my first home at the end of August, and I am glad I did. I don’t know what the market will do in the coming months / years, any more than any financial expert does. I do know that I got a hefty discount on my new home ( new construction unit ), and an amazing interest rate, fixed for 30 years.

    I don’t plan on moving for at least 5 years at the very minimum, so any short-term price fluxuations don’t concern me. Even if I end up just breaking even when I move next, that’s fine. Owning a home is a great feeling, money aside. There’s just something different about seeing your kid play in the back yard with his puppy, and being able to grill out whenever I want.

    No regrets on my home purchase. It’s expensive, of course, but worth every penny and then some.

  3. MoneyNing says:

    Let’s Discuss Money: Actually, 1 bedroom apartments are the hardest to sell because most people buy at least a 2-bedroom when they finally decide to own something.

    On top of that, when you own a place, you need to take care of it, do the maintenance etc while you don’t need to do anything when you rent. Also, the mortgage payment is higher (even by a little bit) once you put the down payment in. So you lose the potential growth of the down payment also.

    So it’s not really that easy! If it was, we probably would all have at least a 1-bedroom place :)

  4. Lord says:

    The reality is, most people that can afford to buy, buy, and all people that can’t don’t. Very, very few people are in the position of renting and investing the difference because they have no difference to invest; they are spending all they can afford. Most of those that can are in the position of expecting to move or not ready to settle down and it doesn’t make much sense for them to at this stage of their life.

  5. Matthew Paulson says:

    I hit the point where I could reasonably afford a house (20% down payment, get it done on a 15 yaer fixed rather easily), but opted to not buy a home right now, because I have no long-term plans to stay in the area. I’ll be graduating in may nad probably moving around quite a bit, so it just doesn’t make sense to buy one right now…

  6. kitty says:

    JohnnyB, while I agree that the real estate market is probably going to go lower; and had I been looking right now, I’d probably wait.

    I do, however, have a problem with a couple of your arguments:

    “Anyone buying a house today will regret it and go underwater immediately. ”
    One may spend more than one needs to, but as long as one can afford the mortgage or needs to sell for some other reason, like a job transfer, one is not going to be in trouble. Also, houses are all different. Another house may cost less, but if one really loves a particular house, one may still be happy with the purchase. While you are living in a house, the change in price doesn’t affect you that much – as long as premiums are within your means. It is the same if the price goes up – you only gain if you need equity or want to sell. It is still your home. Sure, if you cannot afford to buy a property at current prices, you shouldn’t. But as long as it is within your means – what do you care? A house is different from stocks in that house is a home, not just an investment. You don’t just go and sell your house because you want to “lock in gains” or “stop loss”.

    “Rent’s are still 50% of mortages.”
    Are you comparing apples and apples or apples and oranges? Renting an apartment is cheaper than buying a house, but renting an apartment is also cheaper than renting a house. One apartment may be much nicer than another even if they have the same number of bedrooms. On the average, rental apartments are not nearly as nice as, for example, condominiums. If you were to compare a rent vs mortgage for units in the same condominium, you are likely to get less of a difference, even now. For example, in my town you could buy a one bedroom condo for about 300K. You could rent a unit in the same complex for, maybe, $1600-1800. Seems pretty comparable even without considering tax deduction. If you add common charges and real estate taxes into the mix, your total cost may be higher, but not as much higher as you say. Sure, you could rent a one bedroom for less, maybe for $1200, but then you could also buy a co-op for 170K which will be closer to a rental apartment than a condo.

    “We are no where near a bottom in real estate. Bank on it.”
    No argument here, at least overall. Depends on the area, though.

  7. kitty says:

    “Let’s Discuss Money: Actually, 1 bedroom apartments are the hardest to sell because most people buy at least a 2-bedroom when they finally decide to own something.”
    This is true on the average. If the area you live in is expensive, one bedrooms could be the only thing childless couples or singles can afford. I bet in Manhattan, even studio apartments have buyers.

  8. Khyron says:

    Heh.

    Why I rent:

    - Transaction costs on RE
    - Someone else performs the maintenance, and the cost is rolled into my rent
    - Affordability
    - PITI
    - I can reduce my monthly outlay for shelter almost annually
    - I have the option and ability to occupy newer properties annually
    - I don’t want/need lots of furniture or really to have many guests
    - I don’t know how long I will stay where I am; the last time I moved a significant distance, I literally put 1/2 of my clothes in a duffel bag which went on the plane with me. The rest was shipped in my car. My move took 3 weeks from DC to CA, including the shipping time. I moved in 5 hours.

    I’m probably missing something, but the additional costs on RE don’t really make it worthwhile, IMO. I don’t view a house as an investment if I live there, and I’d only desire to live in a SFH.

  9. Kevin says:

    I rent. But only because, in my area, rent is so cheap it is actually less (annually) than land and school taxes would be. And since the wife and I don’t have kids yet, this is obviously financially the better way to go.

  10. I rent. Choosing to sell our home, rent a home and invest our cash into the stock market was the biggest contributing factor to our current wealth. Making this choice (3 years ago) allowed us to retire at age 40. Yes, I’m very happy to be renting and financially free!

    Renting is NOT throwing your money away… rent pays for a roof over your head AND the ability to invest your money in more lucrative ways.

    I’ve been posting a series comparing renting versus owning on my blog:
    http://millionairemommynextdoor.blogspot.com/search/label/Real%20Estate

    • Natalie says:

      OMG. I am so glad to hear that. You are like my sister. But I am just now getting the picture. I prefer to save my money as well instead of putting it into buying a home. This country has gotten so far away from understanding what it means to be liquid. We’ve gotten used to being in debt. You don’t hear people talk about saving money anymore but there is nothing better than having extra cash. I don’t care how much a house appreciates.

  11. Rob in Madrid says:

    can’t provide the link but was reading a MSN article on finances and monster homes and one thing jumped out at me. Mortgage 30,000 a year property taxes 20,000 a year add in private school and your talking serious cash. Those are insane numbers just to keep a roof over your head requures pretty much a six figure job, that doesn’t count the upkeep cost or lifestyle expenses that come with a monster home.

    For my wife and I when we lived in Germany were house prices are much lower we bought a small one bedroom apartment. Total cost was less than we were paying in rent. A year after we bought it we got relocated to Madrid where house prices are insane, think bay area. So while we’d love to buy a place here there is no way we can afford it. So back to renting.

  12. Matt says:

    IMHO it’s not a question of timing the market, it’s a question of assessing value. If you stayed out of the housing market until now, it most likely wasn’t because you “knew that the market was going to crater starting in the spring of 2007 and continuing at least through early 2008″ (which would be “market timing”), but rather because either you couldn’t afford to buy, or you could afford to buy but your local market was clearly on drugs.

    “Market timing” implies that you think you know when the bubble will burst. That’s a different thing than simply knowing the bubble is out there, and avoiding buying near the peak of it.

    My fiancee and I bought a house in the early fall of 2006…the very days when smart bloggers were saying “the bubble is about to burst!” and everybody else was saying “houses will keep earning 50% annual returns every year from now until the sun goes nova, so load up on those option-ARMs and let the ever-inflating market build your equity for you!”. Did we take a bath? Hell no. And it’s because we didn’t buy a $50,000 house for half a million dollars, we bought a $350,000 house…for $310,000. Five miles away, in an infamously hot market on the other side of the border, this house would have cost us almost two million dollars…and if we’d somehow swung the loan to buy it there, we’d be sweating real hard right now.

    Even at the height of the bubble, there were bargains out there. And for those who sought them out and found them (and didn’t borrow more than they could service), there will be no problems.

    For those who couldn’t find bargains during the boom…well, they can certainly find them now.

    (Think I’m delusional about what the house is still worth? Our neighbors just sold a similar house, with less square footage and fewer bedrooms, for $335,000 last week. It was on the market since November, but it sold.)

  13. Kate says:

    We Rent and are happy we do. Here is our thinking, we could afford a house but wish to take the difference between renting and owning and invest. That is where most people who do not buy go wrong.
    If you invest the difference you will (based on historical returns) make more money then if you put your money into a home. We pay about 2/3 the cost to rent as we would to buy. We take the other 1/3 and invest that in a variety of ways. We feel we made a good choice.
    Lets say your home costs 300k. If you put 5% down of 15k your payments with insurance and taxes would be about 2100. The average house (per website research) has an average of 2% per year in maintance or 6000 in this case. After 10 years we would pay 225k in payments, 60k in maintenance of every kind, a downpayment of 15k and realize a tax savings of 50k for a total of 250k in payments. On average over 200 years of US history houses increase in value by the amount of inflation while stocks raise by inflation plus 4% so whatever amount we figure will come out the same. Returns would not be smooth year over year but if you take 10 years you can fairly well expect the averages to take over. If the house appreciates 6% the new value is about 537k for an appreciations of 237k (wow!). I would need to sell it to actually realize that appreciation which would cost me 6% or 32k for a total profit of 202k. Of course at that point I would have to put that into a new house or fall back into the dreaded renters category.
    If I took the 15k and invested that along with the 700 per month difference between renting and owning plus the 6k for maintenance I would have 253k in cash. If I sold my investments to realize the profit that would be 15% capital gains tax or 38k for a total profit of 215k.
    Nobody can know what the future will bring in terms of investments or appreciation. Using the past as a guide however clearly shows you would make more on investments, but ONLY if you had the discipline to invest the money. Most people just spend the difference instead and they are indeed poorer for not having purchased a house.

  14. Natalie says:

    I think this whole buy vs. rent argument rages on b/c somehow buying a home has become an investment, a means to building wealth, or a means to have bragging rights.

    When I was a kid, grownups bought a home when they started a family. They bought homes, not property. They wanted to be able to have the space to raise a family. Now it’s all about investments and building wealth. That’s a mistake. You shouldn’t sit in your home worrying about the market crashing and how it affects your home value or if you put in ceramic flooring and stainless steel appliances how it will increase your home value.

    I bought a home March 2008 and I regret it b/c of the expense and time involved in upkeep. I’m in my yard every weekend instead of bonding and partying with family and friends like I used to. Since buying a home all I do is work and pay for stuff. That’s it.

    My neighbors are snobs who hate me b/c I won’t plant flowers and put cherubs and lawn jockeys and pretty stuff in my yard. I pulled up all my flowers and plants to make my life easier to my neighbor’s dismay. It’s none of her business but when you have fanatics worried about property values this is what happens.

    Furthermore I can barely afford to buy food b/c I have massive utility bills. Yes I have a 93% efficient furnace, excellent windows, inulation. In an apt I paid $16 a month for gas and $40 a month for electric. Now it’s $156 for gas, $100 for water, $103 for electric. Renting you can get utilities included in rent.

    I have finally bought into what my sister says, she rents a home, and is liquid b/c she has cash laying around b/c she doesn’t have the expense of owning a home. She always has money and earns less than I do. Sadly I have to borrow $2, $10, $50 whatever from her each month to buy food. We are putting this home back on the market Jan 2010. Never thought I’d be so happy to deal with landlords and their no pets allowed no smoking no doing laundry after 8 policies. But I’m tired of being broke. My mortgage pmt is only $747 a month. My loan is through Coldwell so there were no tricks to get me into this home.

    I’ve paid off my car, credit cards, and once I sell this home, I will literally save $8,700 cash money EACH YEAR. In merely 5 years I will have nearly $50,000 in cash in my savings account. It’s a no brainer to rent. Doesn’t matter to me how much a home appreaciates. Nothing is better than cash.

  15. Dutchess says:

    I agree with Natalie and so many others here . After being a homeowner for 25 years. I have been a renter now for 4 and wished Id done it years ago … All in all I would be so much better off. I lost so much very slowly over the years that is isnt even funny.. I bought several over the years and I never realized much if anything even when the value on them went up while I was there , which in most cases they did . I have a decent stock portfolio put together for me by a professional and in it are still several industial warehouses that are in a large city , always rented and always my lowest producers.They were left to me by my late father so thats why they are in there . I will never own again

  16. Anonymous says:

    I rent, for Iam saving my money to buy a home in
    Guatamala. There I will wirk in humanities, and rent mu home by the sea.

  17. LarrySummers says:

    After owning a home for 10 years, and enjoying it, despite the high property taxes, I’m now renting. I sold the house to move several hundred miles for a new job. Selling was a nightmare – I had to rent the place out for a year and couldn’t get the tenants out when it came time to finally close the sale; however, I did make a tidy profit. With renting, I feel I can move anytime. However, you’re also at the mercy of the landlord. They may not get repairs done quickly, and our current landlord is being foreclosed on and we may get evicted. So, there are pros and cons to renting and buying. There is no clear answer as to what is “better”.


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