Just Throw Away Your Money Forever or Buy a House

 

            Parade Magazine had an article that caught my attention on May 4^th. Written by Mike Hammer (Isn’t he that old Mickey Spillane detective hero?) it was titled, Great Reasons to Rent.   Huh? He has to be kidding, rent in a buyer’s market? I read it with eager eyes.

            Since I am in an Oregon broker, I suppose I dove into this read with some cynicism, looking for holes I could punch in it. Of course I found them. But for some people, he is right. Some people are not candidates to buy a home. 

            His first point, Renting can save money is a little too simplistic in its reasoning. Hammer states that “You’re paying for closing fees, mortgage interest, property taxes, homeowner’s insurance and maintenance –costs that return nothing on your investment.” He then goes on to say that a person is better off to put their money in stocks or a bank.

 

Not so fast Hammer. Let’s see how that looks together:

His reasoning is a little murky on this and I will get back to that in a bit.

            His second point: Homeowners’ tax deductions are overstated.

Overstated by whom? Anybody would be foolish to take a risk of investment without knowing the tax consequences. Every time you invest you are taking a risk. Even Grandpa throwing his sock full of money under a mattress takes a risk. (i.e. Crack head grandson finds his stash and steals it)

            Buying right is the key.  In general, your tax deductions will decrease the faster you pay off your loan. Let’s say you have a 15 year loan with no prepayment penalty. If you decide to pay it off early by doubling your monthly payments, your tax deductions would decrease dramatically. But your equity would increase dramatically too. You would also see a smaller tax deduction if you put down a very large down payment and have a small loan. The idea is, instead of paying a landlord to live in a place for 15 years and then walk away with nothing, you will have your own home at the end of a 15 year mortgage and get to live in it while paying it off..  

            The risk here with mortgages is that the longer you take to pay and the higher your mortgage, the less your equity really is. The really, really smart buyer would pay off his mortgage fast. I should also point out that money in savings and stocks are taxed yearly on income earned. Stocks get a cute little capital gains tax when you sell them too. Is nothing sacred?

            Back to Hammer’s article and point three: There are more options to renters.  

Yes, he has a point here. People facing foreclosure, or who bought spec property high in 2005 and are buried in negative equity, are turning to leases and rentals and waiting before putting their property up for sale. This has brought an increase in unoccupied rentals statistics since single family homes have turned into rentals in some areas. The increase in available rentals has driven rental prices down and renters can have nicer amenities. So for those who are not candidates to buy a house, these are good times.

            His last point though is really pretty thin. Renting gives you flexibility.  

If you have to move in a very short time, you might not recoup your costs of buying a home. Well, duh. Isn’t that just common sense in any market? If you knew that you might have to move in the near future, why would you consider buying? Remember, any investment is a risk. Most people buy a home with the long term commitment of at least five years to live in it. 

            Now back to Hammer’s murky reasoning. He is mixing apples and oranges of course. Very simply: There are valid reasons for people to rent and valid reasons for people to buy.   I can’t blame him for the reasoning. Heck, some lending institutions blurred those lines about ten years ago when all that jumbo loan stuff hit the streets. If you could walk on two feet and your temperature was warm you could get a loan.

            Before the jumbo loan concept became popular people had to figure out a way to come up with good credit and a down payment of at least ten per cent. At least that was the standard I always heard. Now that loans companies have come to their senses (almost), the pendulum has swung back and buyers have to jump through qualification hoops like before. It was a sad lesson and now the adjustment has occurred.

             Mr. Hammer, some people can’t be buyers right now. This isn’t really anything unusual.  Maybe they are newlyweds and are saving for their first starter home. Maybe they are paying off college debts. Maybe they can buy a used car instead of a new one so they can save for a house faster. Maybe they can live in a cheaper apartment so they can buy a house quicker. Maybe they will go to school to get a better paying job so that some day they can buy a house. Maybe they could care less about buying a house and will rent forever.

             But Mr. Hammer, don’t say that because “there is a rash of mortgage foreclosures, renting may be more attractive.”  This “rash” of mortgage foreclosures in Roseburg and Douglas County is only 1.9%. Almost 98% of homeowners are still doing ok.  If you are a qualified buyer, this is an incredible market for you, prices are low and interest rates are still low. Sweet deals are all over the place! Sellers are even paying six months mortgage payments in some cases! The key here is the word “qualified.” If you aren’t qualified, any housing market, high or low, is not for you. That’s the way it has always been in home ownership, until the jumbo loans scrambled up Americas’ perception for awhile.

             Home is where the heart is. If you can buy it, that’s great. But if you rent it, it’s still your home.