You need to factor in the opportunity cost of your down payment.
In a reasonable market, renting a property should ALWAYS be more expensive than owning it - even if we assume the operating costs are all passed on to the final user (that is, leases are “triple net”), the owner takes on the additional risk of falling property prices, and MUST charge a premium for his investment. If owning a property is more expensive than renting it, then property is overbought.
Typically, the viability of a property is calculated in the form of a capitalization rate.
Yes, because property taxes don’t really pay for anything right, those are strictly losses? Like roads, police, water, sewer, trash, schools, etc. :rolleyes:
These institutions are leveraged against the higher interest rates and the predicted income. You take away that source of money flow and they become insolvent, or close to it. Throw in some defaults and they go under.
Because everybody in the US has the right to bear arms, and a complete collapse would mean a lot of people out of work with no source of income. How would we distribute the food? The American way of life is flushed down the toilet and the world is a much scarier place.
It’s not all about the economics of the situation, you really have to think about how the people will react out there. This is an extremely delicate situation…
It has been suggested that home values are about 1/3 over valued. That means it is a financially logical move to walk from an overpriced mortgage. To simply pay 300 thou for a house that will now be valued at 200 will be a hard sell. From a home owners viewpoint, why should they. ? You would like them to think a deal is a deal.but, is it logical from their position. To make payments for 30 years and know you will never get it back is not easy.
First, I don’t think most mortgages last 30 years. And second, you buy a home to live in, not to profit later. Sure, it’s nice when you can profit later, but this shouldn’t be the main goal. If you buy for the long term, short term losses shouldn’t get you in a tizzy. If the goal is to profit, you MUST accept the risks when things don’t go your way, no different then putting it on black and spinning the wheel. You don’t see bailouts for losing gamblers, why is an invesment house any different?
When you rent, property taxes are factored into it, so I do think it is fair to include them in the calculation.
erislover, I basically agree with you. (BTW, did you factor the tax advantages of owning into your calculation?) I don’t know how you’d include the fact that a mortgage gets effectively discounted thanks to inflation, while rents will track inflation. In fact, they might increase faster, which probably indicates a rising market, which means the owner wins even bigger.
The exception, to return to the point of this thread, is deflation, which is where the renter wins and the homeowner loses.
Because there would be a lot of suffering and chaos, and probably little if any “rebuilding” for a long time. Everyone would sit on what little they had, the economy would stagnate, and the depression would go on and on and on . . .
The Herbert Hoover solution of doing nothing and letting society collapse doesn’t work.
I did not, as I did not have a handy way of doing that. But there are many advantages to owning a home besides tax advantages, like easier credit. It is well beyond my meager capabilities to account for them all. There are also advantages to renting in terms of mobility, which is user-dependant. Moving frequently from house to house is considerably more expensive if for no other reason than closing fees etc which I also did not account for in my calculations. Also, as mentioned, the opportunity cost of the downpayment is interesting to consider, which I hadn’t.
I have no data for this, but my intuition tells me that lenders account for some expected inflation via the interest rate. In principle rent could track inflation, but in my 12 years of renting, it doesn’t seem to in practice, in that I’ve only once had my rent raised on me. [Ohio and Massachusetts]
It’s possible, but again, it is important to figure this out relative to the alternative, not in absolute terms of the purchase price, which is not especially meaningful in this case (since it is safe to assume you will be living somewhere). Certainly the shorter you’ve been paying your mortgage, the more the change in market price could hurt you in principle. Also, as you mention, people do have to move for other reasons like work, so there is always some flux in any particular area, and depreciation is a downer there.
Like I posted in another thread. Lets say you buy a house for 400 thou. It is now worth 250. Do you just continue making payments for 30 years on a 400 thou house you don’t own. A guy buys the house down the street tomorrow. He pays 250. You should just stay and make much, much bigger payments. Or do you walk. Then buy a house for 400 later that is much nicer. It is not that easy to tell others how they should spend their money, when they could get much better value.
Should the mortgage company refuse to renegotiate. They know you are paying much more than the house is worth. Too bad, just pay double and shut up.
But they borrowed money that was not theirs with a signed contract stating they would pay it back. The money they borrowed is everybody’s money that has an financial account, including your money. Now many are just walking away from their obligations to these loans, and are unable to put the money they owe back into our savings accounts. To allow you to keep seeing your balance when you log on to your account, money needs to be printed from the government, so you don’t panic. It’s dishonest to not pay back the loans, and it ultimately devalues your money over time.
This happens everyday with automotive loans. You would have to be a complete moron not understand that a brand new car is worth less than you bought it for as you drive if off the lot. But people understand that the loan needs to be paid back for the loan balance of the new car price, regardless of the plummeting value of the new car for its usable life. Why should homes be any different? Of course you could argue that people understand that cars depreciate, and houses appreciate. But nobody ever said that homes always appreciate (or that collector cars cannot appreciate), and that there is risk involved when you take a loan on the perceived value of whatever you used the money for. And if the value falls on your investment, you still need to pay back the loan, regardless of value.
One might imagine that the owner might pass this on to the renter, either in the terms of the lease (business lease) or indirectly as part of the rent (domicile).
That doesn’t even make any sense.
The problem isn’t that there are a bunch of homeowners who have to have their homes foreclosed on or have lost the value of their homes. The problem is that because the banks are now stuck with all those bad loans, they are unwilling or unable to lend money needed to finance economic growth. Businesses looking to expand, new homeowners who might want to take advantage of lower prices, even other banks can’t get the capital they need.
This is a complicated topic and hard pinpoint at all times. But over a long period, on average, unless you are going to move frequently, buying is usually financially best.
To paraphrase someone else, renters are paying their landlords expenses, plus a little. In the short term rent should be lower than the payment on a new mortgage. But over time rents go up, and mortgages stay the same and go down. Owners have to deal with repairs and maintence, but that gets factored into rents just like insurance and taxes. The longer you live somewhere, the more this is true. Your mortgage should stay the same until it is paid off, and depending on where you live, you taxes can only go up so fast until you sell (CA Prop 13 limits, for example).
Now, if you get interest only and never pay any principle, or you upgrade houses every five years, or you have a catastrophe that is not insured, and the situation changes.
You need to compare the cost of renting vs your mortgage payments. The opportunity cost associated with putting the difference into the mortgage instead of an investment with a higher return. The expected real increase in value of your home (IOW adjusting for inflation). The additional costs of maintenance and taxes. I would also say that if you are in a place like New York City, you also need to account for the cost of owning a car and commuting via the train vs not owning a car and getting to work that much faster.