mid-town residence. Some give me a look as though I have no concern for the future, and their choice to "buy" a home somewhere in the woods makes them happier, more stabilized people.
What they don't seem to understand is that I'm not paying for the apartment but the ability to walk out my door and reach my office, grocery store, drug store, subway, central park, restaurants, and friend's apartments in minutes. While Manhattan is certainly not a "downtown" base of a small town, I think city living does provides that sense of a walkable neighborhood. Because of the deterioration of downtown location, I feel like I have to choose between living in a city and living in the woods where it takes me half-hour to get anywhere of interest.
While it’s not top of mind for me right now, with all the buzz around me, I wonder when is a good time to buy?
I find myself in a similar position to the above poster. I'm 28, earn a middle or maybe even upper middle class income yet I don't own a home or a car. I've attempted to explain the financial benefits of my living arrangment to others of my social class but they typically just look at me like I'm some type of cackling baboon. On this site I've explained the financial logic behind going car-less if you are able to swing it. Here are some clips from two of my favorite blogs regarding the logic of renting instead of buying a home in the current market. First from Patrick.net, a housing crash blog. Patrick put together a list of 30 reasons why renting is superior to owning in many markets including where I live, the San Francisco bay area. Here are just a couple of them:
What are their arguments?
#1: "Renting is just throwing money away."
FALSE, renting is now much cheaper per month than owning. If you don't rent, you either:
Have a mortgage, in which case you are throwing away money
on interest, tax, insurance, maintenance.
or
Own outright, in which case you are throwing away the extra
income you could get by converting your house to cash, investing
in bonds, and renting a place to live. This extra income could be
50% to 200% beyond rent costs, and for many is enough to
retire right now.
Either way, owners LOSE much more money every month than renters. Currently, yearly rents in the Bay Area are about 2% of the cost of buying an equivalent house. This means a house is returning about 2%, and it is a bad investment. Pretty much any other investment is better. If you don't like risk, put your money in US Treasuries at 5%.
broken. I would think every rational businessman would take the extreme discount renters are enjoying.
"There are great tax advantages to owning."
FALSE. The tax advantage is not significant compared to the large outiright monthly loss from owning. For example, it is far cheaper to rent in the San Francisco Bay Area than it is to own that same house, even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost about $700,000. Assume 6% interest, and we can see that a buyer loses at least $4,936 per month by buying. Renting is a loss of course, but buying is a much bigger loss.
Renting:
Rent: $1,800
----------------------
Monthly Loss: $1,800
Buying:
Property Tax: $486 ($729 per month at 1.25% before deduction, $486 lost after deduction.)
Interest: $2,333 ($3500 per month at 6% before deduction, $2333 lost after deduction.)
Other Costs: $450 (Insurance, maintenance, long commute, etc.)
Principal loss: $1,667 (Modest 3% yearly loss on $700,000. Reality will be much worse.)
----------------------
Monthly Loss: $4,936
This is a very conservative estimate of the loss from owning per month. If you include a realistic decline in house prices, as in this rent-vs-own calculator, you'll see that owning right now is a very poor choice. Here's a more optimistic calculator which ignores price changes entirely. House value losses will stop eventually, but it could take 5 or 10 years to bottom out.
Remember that buyers do not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest. Of course the creeping AMT will eliminate the mortgage interest deduction soon anyway. Ah, you didn't know that there are limits to the mortgage interest deduction and that more and more people are hitting that limit every year?
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
taxes, etc. Since you can rent a house for 2% of its price, but have to pay 6% to borrow the equivalent amount of money, it is much cheaper to rent the house than to rent the money.
Then there's earthquake insurance. It's really expensive, so most people just skip it and risk everything on the chance that no earthquake will happen.
If you need further proof that owning a McMansion is financial suicide, try the following experiment. You will need:
Equipment
Measuring Tape
Calculator
Telephone
Debit card
Lighter
Directions
1. First, calculate the total cost of living in a house of your size including mortgage, taxes, electricity, insurance, and gas. This is number A.
2. Using your measuring tape figure out the square footage of all the rooms in your house that are not in use daily. Subtract this from the total square footage of your house.
3. Now, using your telephone, call and find out the total cost to own a house that is the smaller square footage. Include the mortgage, tax, average gas and electric bills. This is number B.
4. Again, use your calculator to subtract number B from number A. Write down the dollar amount.
5. Now, go to an ATM and using your debit card, withdraw the dollar amount you calculated in step 4.
6. Bring the money home and put it in your kitchen sink. Using the lighter, set it all on fire. You heard me right. Set all that money on fire.
Oh. You don’t want to do that? Why not? You’re doing it now every fucking month.
Don’t stop there; you’re not finished yet! Now you’ve got to calculate the cost of furniture to put in all those rooms you never use. Go ahead and set that money on fire, please. Oh, and the pictures on the walls and the window fucking treatments? That’s right, into the fire pit with that money, too.
Feel good about that McMansion yet? I guess now is not a good time to remind you that even rooms that you never use still need periodically cleaned, dusted and vacuumed. I’ll let you just calculate that little inconvenience all on your own.
The icing on cake is that people who didn’t calculate the full cost of their status symbol before putting themselves into debt are now forced to sell in a market where houses like theirs are sitting empty because savvy homeowners want no part of them.
