Don’t Believe The Hype: Housing Has Much Further To Fall
If you’ve listened to the radio or watched TV lately I’m sure you’ve seen or heard the commercial telling you “it’s a great time to buy.” Here is the youTube of the commercial:
I’m certainly skeptical of their claims. The value of a home doubles every ten years? My parents have lived in their home for 25 years now and it’s probably just moving into double territory now. All the while they have been making improvements and doing maintenance. It should be noted that they live in suburban Pittsburgh, a town which has not participated in the housing bubble. Clearly if they purchased based on advice like this they would be hiring a lawyer… Historically even the bubble areas even out over time, the appreciation on a home typically exceeds inflation by less than 1%. Given the low inflation numbers in recent years, it’s very clear that things are way out of perspective.
So if my parents aren’t making any money on their home appreciation, why would anyone buy a home in suburban Pittsburgh? The answer is because it is cheaper than renting. My sister recently purchased a townhome there in the $150k range, 3 bed, 2 bath, garage, 2000 SQ Ft. at with 20% down and 6% APR for 30 years it puts her payment in the neighborhood of $700 a month, of which $120+ goes to principle every month. The interest charge is $580 and decreases every month. Renting a similar home would cost about $1150 a month. Obviously renting avoids the costs of homeownership such as property taxes (1.5% of home’s value a year in her area = $2250) and maintenance(estimated at 1% of home’s value a year = $1500). So $700 - $120 priciple + $187 taxes + $125 = $892 a month to buy vs. $1100 to rent. Buying is clearly cheaper.
Now let’s compare that to my situation in suburban Boston, a bubble area. I am currently renting a 2 bed, 1 bath, 1100 SQ Ft. apartment in a two family building for $1500. The building is currently assessed at $600,000. If I purchased half the building for $300,000 (my unit) the mortgage would be $1450 a month at the same 20% down, 6% APR for 30 years. If we run the same 1.5% tax and 1% maintenance here we get: $1450 - $238 + $375 + $250 = $1837 a month to buy vs. $1500 to rent. Renting is clearly cheaper.
I’ve ignored 2 factors in these calculations: insurance and taxes. Insurance can vary greatly based on where the house is, how old it is, etc. The calculation would be far too complex to introduce here but suffice it to say its a significant cost. It’s true that there is a significant tax benefit on the interest portion of your mortgage payment, however you need to be careful to include the fact that by itemizing your deductions you give up your standard deduction. A simple calculation of the tax savings would be (interest paid - $3000) x .25 = tax savings for single filers and (interest paid - $6000) x .25 = tax savings for married filers.
Renting has various intangible benefits. I don’t have to shovel snow. I don’t have to cut the grass. Water, sewer, landscaping, and snow removal is included in my rent. If I change jobs and want to move closer, I can move as soon as my lease is up. So the question then becomes why would anyone buy in the Boston area when the price vs. rent calculation is so out of whack? The answer previously was to get in on that great doubles every 10 years appreciation. It’s very clear that the days of double digit appreciation are over. That incentive is completely gone. So it’s starting to become very clear where the bottom will be for housing prices. When it costs more to rent than to buy is when prices will start to stabilize. Until then prices will continue to fall.
