I expected this to be about the wisdom of buying a house in the current US market. It is an interesting article even though it doesn't address that question. But for most people, financially speaking, buying a house at the moment would be a really bad idea. Yes, there's cheap credit, but there is also essentially no chance of significantly appreciating prices for at least the next five years, and a strong chance of prices dropping further as a result of further recession and uncertainty about the legal status of foreclosure procedures.
Your analysis leaves out a very important factor: rents. If you don't buy a home, you have to rent.
If your mortgage payment is below the going rents (not too difficult to achieve if you factor in the tax write-off), then one way you can look at that is you give an $X down payment now for a free house in 30 years. If you look at it that way, slow growth doesn't look quite so bad -- the house only needs to be worth about $8X the down payment in constant dollars 30 years from now. Assuming 20% down, that's only appreciating 60% in 30 years, which is only assuming about 1.5% growth in home value per year.
Inflation should probably also factor into your analysis, for those who believe that inflation is likely in the long term.
Buying a home also offers a lot of stability on your long-term housing costs. Even if you buy and sell every few years anyway[1], the fact that you are both buying and selling at the same time leads to a fairly even end result. With renting, you are always purchasing on the spot market[2]. Avoiding risk and having control over when you move both have a value.
[1] Of course, buying and selling every few years is very costly, but it doesn't affect the stability argument.
[2] And it's not just luck when you happen to be moving around. If you are buying into an area because of a new employer, there's a good chance that the employer is hiring, and that a lot of people want that same apartment.
Since the tax-deductible nature of mortgages also applies to your landlord, that factor nets to zero. Inflation also nets out to zero, since both the borrower and the lender (and the landlord and the renter) are using the same currency. Unless you argue that home buyers are systematically better at accounting for inflation than bankers, of course.
The way I would look at it is that I buy housing the way I buy groceries, clothes, and pretty much everything else: I buy it when I need it. I mean, sure, if I bought an orchard I could get apples for "Free" after I'd paid the mortgage, but that's just bad accounting.
The problem with buying a house is that it's a massive bet on your local labor market. Your job (your biggest asset, in terms of net present value), is also a bet on the same market. You're levering up massively in order to bet on one of the biggest un-controllable risks you face, and you're paying 7% transaction costs on the purchase and the sale in order to do so.
A cheaper way to make this bet is to borrow several times your annual income, and bet on your being laid off (i.e. you make money if you don't get fired, and you do make money if you do get fired). That would be a terrible decision.
They are deductible by another means (business expense). But you pay rent in after tax dollars. Imagine having a neighbor with and identical house--you both agree to swap and rent to each other. You would be worse off than sticking with your mortgage (if you rent to each other for $0, it works out the same as the homeowner deduction).
Someone who bought their house in 2006 still has the same mortgage payment (actually, perhaps lower if they were able to refinance).
Buying things for the future (whether housing or cattle futures) does offer price stability and insulation from market fluctuations. It doesn't automatically make it a good investment; but stability is good, and it's perfectly rational to assign some positive value to it.
I was just trying to put things in perspective. There are perfectly rational reasons to buy a house. When the rents are higher than what a mortgage payment would be, it's a pretty reasonable thing to do for a lot of people, based on some pretty reasonable projections.
You can still disagree, of course. You can say that 1.5% growth per year in home value is too much to ask. You can say that rents will fall, therefore making your mortgage payment higher than rent. Or you can say that a 7% return is not good enough for you. Or maybe my analysis was wrong, in which case you can point that out.
>Inflation also nets out to zero, since both the borrower and the lender (and the landlord and the renter) are using the same currency. Unless you argue that home buyers are systematically better at accounting for inflation than bankers, of course.
Stranger things have happened. Bankers have been wrong before. You could say that home sellers were right when banks who loaned money to buyers were wrong in 2006. I think inflation is likely to be higher than most people think, because there's no politically possible solution to the government's debt problems other than inflating our way out of it, despite its previous record of being a reliable debtor. If I'm right, that will mean that home buyers are indeed systematically better at accounting for inflation than bankers (or more like they will turn out to accidentally happen to be right).
At any rate, if the cost of renting is close to the cost of buying, as it is in my town (it's about the same here except that you don't have to fix the roof, etc, if you're renting), then even if I'm wrong, I won't lose much money as a new homebuyer in the next year or so.
>The problem with buying a house is that it's a massive bet on your local labor market.
That depends on your job. If you're have some specialized job or you're in a small town, that's something to think about, but lots of people have jobs for which they would never have to move. Even if that is an issue, it also depends on how comfortable you are with being a landlord, and how many people you know who would make likely good tenants.
"Since the tax-deductible nature of mortgages also applies to your landlord, that factor nets to zero."
My analysis still holds: if your mortgage is less than rent, then you can do calculations based on the price from the down payment rather than total appreciation on the home.
How the mortgage payment ends up lower is irrelevant. All I meant by the mortgage interest thing is that you have to remember to adjust downward a little to account for that.
Home buyers are systematically better at planning for the long term than bankers, because most bankers don't plan to be working at the same bank 30 years from now - or, if they do, they don't expect to be held accountable for the loans they approve today in 20 or 30 years. Otherwise, what banker in the nation would offer 30-year fixed-rate mortgages at 4.25%?
Inflation plays a huge role with regard to timing and compared to the average mortgage rates of other owners/landlords. If you start a 4% fixed rate mortgage today and do not move anywhere in 10 years, you don't have to cover the cost of credit for whatever the interest rate at that time is (probably higher) because you don't have to reset/move.
People with children should ignore your advice. 1/4 mile from where I live is another city with horrible schools. People living there will need to send their children to private schools, at about $20k/yr. Where I live, the public schools are top notch. I know several families that moved here and bought a house (there is very little rental available, and it's expensive). A family with 4 children will save about $80k/yr living here. That changes the equation quite a lot.
People with children in any state of the United States that does not yet have public school open enrollment might consider asking their legislators to enact public school open enrollment, which works well in Minnesota, Iowa, and perhaps other states. Public school open enrollment, which has been going on in Minnesota for more than twenty years, gradually encourages public school districts (which are usually local oligopolies who don't have to listen to clients very much) to compete on the basis of quality and flexibility of their programs to gain student enrollment. Public school open enrollment also decouples decisions about where to live from decisions about where to enroll children in school, which is good public policy on several grounds.
After edit: In relation to comments in other subthreads here, about the cost of paying a mortgage versus the cost of paying rent, the odd thing about the bubble economy in this town is that mortgage payments got to be MUCH higher, even at low interest rates, than prevailing rents for the same or very similar properties. It has been financially advantageous for a long while in this market to rent rather than buy, and perhaps still is for several years to come. The whole issue is fraught with public policy implications and sometimes very difficult economic assumptions.
I never said anything like that. I said in the place I live, there are few rentals available, so the decision is to buy in my town or live (rent/own) in the other town (with bad schools). My point was, the savings on private schools makes the "should I buy?" question much easier to decide.
One strong leading indicator of house price is rent. When rent is increasing, house price is 1.5 to 2 years away from appreciation. This is because increasing rent means the vacancy in a market is going down, more people coming into the area. Higher rent will push some people to start buying houses. Both factors force house price higher in the near future.
If you have any pointers to evidence that rents are increasing in the US, and of a historical positive correlation between rental prices and house prices, that would be very interesting.
Real estate markets tend to be local markets; it's kind of difficult to do prediction on the whole U.S. market. The local real estate companies or rental agencies should have current rent and historical rent level for local markets. For me, I just go to Craigslist and do some quick search to get a gut feeling.
Consistent rent increase is a very important indicator because it means couple things:
- More people are moving into an area, due to new jobs, more economic activities, etc.
- It's easier to rent than to buy so people moving into an area would rent first. Buying takes more commitment so it lags. Rent is a leading indicator of buying.
- As more and more people move in, housing supply can't keep up. Vacancy goes down. 5% is kind of the frictional vacancy barrier. At below 5%, rental market is white hot. Rent would creep up slowly first and then faster.
- The rent vs buy debate would tilt to the buy side.
- With more people in an area, lower vacancy, and ever increasing rent, more people will favor buying.
- House price goes up as a result.
In the last cycle in the SF Bay Area, rent had noticeable increase starting around 95 and 96. House price started going up around 98 after being flat since 89. Rent became white hot around 2000 and 2001. Then crashed at the dotcom bust. But house price kept going up abnormally because of Fed's low interest rate policy until the 2005/2006 bust.
