The yard and white picket fence have lost their sheen.
I don’t own a home and don’t think I ever will in the extremely expensive city in which I live. That’s more a happenstance than a conscious decision.
But it seems I lucked out. Owning a home has always made some people less mobile. Now, it’s a veritable anchor keeping many owners stuck in place.
As home prices start to drop again, most Americans have probably already wised up to the painful lesson of the housing bust: A home is not a piggybank.
Some Americans thought they were going to rely on home equity to fund part of their retirement. Wrong. Others probably thought by buying a home right out of college, rising home prices would let them sell and “upgrade” to a bigger and better home. Wrong again.
That makes it no surprise that more renters today say they’re more likely to keep renting rather than buy, according to Fannie Mae.
On the other hand, you’ve got mortgage rates near all-time lows, and seemingly smart investors saying that if you can buy a home right now, you’d be crazy not to.
I wouldn’t blame you for being completely confused as to whether homeownership nowadays is a good thing or a bad thing. But here’s how I’m thinking about it.
Boom times in the “Peace Garden State”
The recession did hit North Dakota. Its unemployment rate rose 0.8 percentage points between December 2007 and 2010.
But with 3.8% unemployment, you’d think residents in other states might be eyeing a move, if their employment situations truly were desperate.
North Dakota is going through an oil boom right now, which increases the need for petroleum engineers, drill operators, and all the retailers, doctors, and so on that would support them.
Granted the state is remote. It’s cold. It likely doesn’t have the cultural opportunities of a Miami or New York. When it comes down to it though, of the 15 million or so unemployed people out there, there’s got to be a bunch of families who decided to make the move, right?
Over the last few years though, the state has been literally begging people to come and take their jobs. The state has about 14,000 jobseekers, and the state-run employment website has 14,000 openings listed. You’d think that’s a boon for the state, but the truth of the matter is, it’s facing the kind of situation that makes businesses wary. If you can’t hire people, you can’t grow your business.
Where are all these movers to the Peace Garden State? (Seriously. That’s its nickname.)
Well, there’s a chance they’re stuck in Florida, California, Nevada or any one of the dozens of states that experienced huge drops in home values. Not only can they not sell their homes, if they did, they might owe money on their mortgages.
So even if they did become unemployed and desperate, they might not be desperate enough or have the ability to afford to forgo the tens of thousands of dollars it’d cost to leave.
Interstate migration was already on a downward slope before the recession started. I haven’t seen any research (yet) that analyzes how much that downward slope has shifted due to the recession, if at all. In fact, it could be that foreclosures are balancing out any homeowners who are underwater and anchored.
But that doesn’t mean it’s not happening on an individual basis. The anchor-home phenomenon is something we’ll be talking about as long as home prices continue to drop.
Do home prices have farther to fall? Is that even worth thinking about?
Over very long periods, home prices tend to track inflation. But at any one time, they might be below or above the trendline, leaving you wondering whether or not now is a good time to buy.
Sometimes the bust makes us forget how strong the boom was. During the housing boom, home prices grew nearly 20% per year on average—about 6 times faster than what you’d expect from inflation. That means, they could have even farther to fall. To get back to that historical trendline, you’d need to see home prices fall another 20% this year.
Even if you put down the full 20% on a new home, that scenario would wipe out all your equity and possibly leave you underwater. It doesn’t seem so crazy, given that there are still so many foreclosed homes for banks to worth through.
Sure, it might not happen. But that’s another thing keeping me from buying right now.
A broken maxim: Buy if you’ll stay for 5 years.
There’s a commonly held belief that buying makes sense as long as you don’t plan on moving for at least five years. That gives you time to build up equity—the first several years of a mortgage have a disproportionate amount of the payment going to interest.
Thing is, nowadays, who can be sure that you’re going to stick around for five years? Especially for young people, job changes can be rapid and frequent. It is said that the average Gen Y-er will hold seven jobs in his or her first 10 years of work.
It’s hard to reconcile that with a home purchase. Let me re-phrase the maxim: Buy a home only if you know you won’t lose your job, get transferred, or find a better job elsewhere. AND you have to say the same thing will be true of your spouse. Oh, and you probably shouldn’t buy a home if you think you might get a divorce (sadly common) also.
That’s a lot of ifs. And for me, it’ll probably keep me from buying for a while.
Granted, I’m skipping all the benefits of a home purchase. If prices go up, it makes living cheaper. There’s psychic benefit in having property. You can also remodel and repaint in ways that renters are restricted from doing. Does that outweigh the risk?
Anyway, looking forward to arguments for or against.
{ 9 comments… read them below or add one }
For the real probablity one will divorce, check out the calculator [1] Betsey Stevenson the Chief Economist of the Department of Labor put together while still a university professor. Education level attained, age at marriage, and time period in which the marriage occured change the probablities significantly.
[1] http://www.divorce360.com/content/divorcecalculator.aspx
Importantly for environmentalists, if you own your home you get out of the landlord/tenant incentives split for efficiency. House owners have incentives to make capital investments in efficiency and moderate consumption. Usually either landlords have few incentives to, say, make sure a house isn’t a heat sieve, or tenants who don’t pay the bills keep the thermostat at 80 all winter.
Thanks for finally posting again. I was beginning to get worried.
I bought a foreclosed house after the start of the recession, but before the real crash hit. Unfortunately I was about 1 month too early to receive the tax credit for first time homebuyers (The one that had to be paid back). I don’t think our house is quite underwater, but we’ve also spent about $10,000 in repairs and upgrades without raising the value an inch.
That said, I don’t regret our decision because living without neighbors above and below me has been nice. As has the ability to paint when we feel like it and to upgrade the windows to make the house a little warmer. Fortunately, both of us have kept the same jobs for the last 3 years and that doesn’t seem likely to change soon.
Well said. I came to a similar conclusion a while ago, that fundamentally, or at least theoretically, buying vs renting is kind of a wash: http://messymatters.com/buyrent
Our tax laws subsidize our investment in a home versus renting. Sometime in the future you should profit from selling your home. This presumes you did not get caught in the housing bubble.
I’ll do a miniature “pro’s article”.
I own. I bought about 9 months ago. I bought a condo, which many people thought was extra-crazy, seeing as how they tend to be on the worse end of housing trends.
Even with HOA fees (which cover some great services) I am paying LESS than I would if I rent – which is becoming a common theme for the market. I got $8k towards it, and in about 2 year, I could rent it if I wanted to (I do).
On top of this, I renovated one of our two (!) garages into a gym, saving my wife and I serious money on our otherwise monthly gym fees.
I joined the condo board (which a renter cannot do), and we are currently sifting through the condo’s financial plans for the next 20 years – and engineering firm evaluated all the repairs and updates that would be needed to keep things running well and housing prices up.
I get to contribute and push things towards a “green initiative” for the whole complex, and even though the board is largely 55+ years old, they love it, because in the long run we all save money.
So my benefits are:
-rent it (at a very good profit)
-I got $8,000 towards a sub-100k condo
-I get many of the benefits of renting, plus all the benefits of owning (remodeling etc)
-I’m saving more money each month by renting
-influencing probably 500+ people (across 200 units on the complex ground) to be more fiscally and environmentally responsible without them even doing much (or knowing about it
I think the benefits are so high, in fact, my wife and I are considering buying another unit or 2 to rent. Many of the board member own between 5 and 15 units, all of which rent easily (and at a profit). The thing is, housing prices have fallen, and rent barely did. When rent fell, it did so in the form of discount and rebate which are now ending. Many of my friends who are renting have seen a 5%-25% increase in the rent when they moved in. Now that more people rent and the demand is high, those are “the breaks”.
So if you actually turn your house into an investment, rather than think of it as investment, it can be incredibly worthwhile to rent. Landlords are loving the bust (I know 10-20 of them) – they are raking in rent, buying properties, and refinancing their mortgages – all to turn HUGE profits.
If people want to keep renting that is great – I get the mobility thing (I’ve moved all around the east coast and across the country to Denver now). But someone has to own these places for someone else to rent them. Everyone needs somewhere to live.
Besides, let’s look at many of my relatives and parents. Sure, they lost equity, but since many of them bought their most recent house 7-15 years ago, many of them are still holding housing that are worth DOUBLE what they bought them for. That roughly a 5% return per year on the bad end. I wonder if stock holders could say the same for their 7-15 year portfolio? (I couldn’t).
And let’s look at the other side of the coin: the down-side of renting. Even with house price being low, rent prices are not (and they keep going up!) My wife’s parents are 55 and 53. They don’t own. They began renting a house at about $1,000 a month ten years ago. Now its $1,750. As they near retirement, they are having an “OH CRAP” moment. The rent is beginning to become too high for them to afford. And this is with both of them working full-time. If they had bought 2 decades ago, not only would they have a nice, fixed monthly mortgage payment, but by the time they retire, their monthly “rent” would be $0. Much better than $1,750.
(Which will likely be $ 2,375 by then). That alone could be the difference of retiring at 55 and retiring at 70! (I did the math in Excel – that’s not an estimate).
That’s why I think if you do it the right way, a home is not only a good buy now, but a great long-term investment.
However, I will say that Pop is right – you have to plan on living in it (or renting it) for a decent amount of time for it to make sense.
My advantage is that I know, as much as any of us can know anything, that I will be here for at least three more years and likely after. But if I’m not, I have some trusted associates on my condo board that are property managers (the whole sha-bang – repairs, finding tenants, collections, etc).
I really like this (http://www.nytimes.com/interactive/business/buy-rent-calculator.html) calculator for deciding to buy/rent. I can’t really think of any significant variables it leaves out…
Underwater homes have certainly cut mobility and worsened the unemployment situation.
I assume that North Dakota is just an example of a place with jobs but people shouldn’t reasonably expect that ND jobs would make a dent in the national figures. The population and total employment in ND is pretty small compared compared to the nation. If 25,000 unemployed people moved from California to ND then ND’s unemployment level would hit 10% and CA’s would drop maybe 0.1%. The oil industry has helped ND but total mining industry employment in the state is still under 10k jobs and they’ve only added a couple thousand jobs in the past couple years. Many individual companies have laid off more people.
I never understood the way Americans used their house as a piggy bank.
It is however a kind of investment for retirement. It saves you all the rent you would be paying while retired. Assuming, of course, it’s payed off by then.