Despite being an outspoken renter over the last five years (I’ve actually been a renter since 2001), I still believe there are virtues to home ownership. The emotional benefits are palpable, and there are financial reasons to own. The main financial reason I plan to own again soon is to lock in a cost of ownership lower than the cost of a comparable rental. A secondary reason is to obtain the “forced savings” benefit of a conventionally amortized mortgage. I know a lender would give me a HELOC if I asked, but I have no intention of it. At some point, I want to pay off a mortgage and live truly free.
Renting has been good to me, particularly over the last several years. At some point, I will buy a home, although given the current state of inventory, it won’t be any time soon. A new study says perhaps I would be better off remaining a renter. Financially, to come out ahead as a homeowner, I will need to hold the property long enough for appreciation to cover the cost of selling. Plus, I will need to lay off the HELOCs. My plans are to do just that, so I will come out ahead. I recognize the need for a disciplined approach. For those who don’t have such discipline, they will be better off renting — unless of course, they plan to game the system and live as a Ponzi….
Renting v. Buying: New Evidence Emerges & Informs Housing Policy
e21 Staff Editorial | 05/06/2011
The basic premise behind the panoply of government policies aimed at stimulating home construction and financing – the mortgage interest deduction, Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA) loans, down payment assistance, among others – is that homeownership yields huge societal benefits in the form of improved neighborhood aesthetics, reduced crime, and more civic attachment.
The purported benefits of homeownership could actually be a classic case of reverse causality, as higher income households less likely to commit crime and more attached to the community tend to also be more likely to own homes.
The same is true of wealth studies that purport to show homeowners are wealthier than renters. It’s true that homeowners are generally much wealthier than renters, but it’s not because they owned their homes. People who have the financial discipline to sustain home ownership also have other financial habits such as saving which contribute to overall wealth creation. Although many renters also have these characteristics, a larger percentage of homeowners do; thus they have greater wealth.
However, even if these social benefits are only imaginary, the basic economic proposition of “owning” a home is often assumed to be so far superior to “renting” that government policies to allow the marginal household to buy a home make sense –simply because they provide an avenue towards wealth creation.
The sense that homeownership was an essential building block to household wealth was a key psychological driver of the mortgage boom. As much as government policy was to blame for getting people to purchase homes that they otherwise wouldn’t, it is important also to acknowledge the role played by “societal coercion.” As Yale professor Robert Shiller explains, “bubbles are impossible without extreme public enthusiasm.”
No kidding.
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Proprietary Irvine Housing News home purchase analysis
$899,900 …….. Asking Price
$568,000 ………. Purchase Price
3/11/2002 ………. Purchase Date
$331,900 ………. Gross Gain (Loss)
($45,440) ………… Commissions and Costs at 8%
============================================
$286,460 ………. Net Gain (Loss)
============================================
58.4% ………. Gross Percent Change
50.4% ………. Net Percent Change
4.4% ………… Annual Appreciation
Cost of Home Ownership
——————————————————————————
$899,900 …….. Asking Price
$179,980 ………… 20% Down Conventional
3.64% …………. Mortgage Interest Rate
30 ……………… Number of Years
$719,920 …….. Mortgage
$175,129 ………. Income Requirement
$3,289 ………… Monthly Mortgage Payment
$780 ………… Property Tax at 1.04%
$175 ………… Mello Roos & Special Taxes
$225 ………… Homeowners Insurance at 0.3%
$0 ………… Private Mortgage Insurance
$55 ………… Homeowners Association Fees
============================================
$4,524 ………. Monthly Cash Outlays
($741) ………. Tax Savings
($1,106) ………. Equity Hidden in Payment
$214 ………….. Lost Income to Down Payment
$132 ………….. Maintenance and Replacement Reserves
============================================
$3,024 ………. Monthly Cost of Ownership
Cash Acquisition Demands
——————————————————————————
$10,499 ………… Furnishing and Move In at 1% + $1,500
$10,499 ………… Closing Costs at 1% + $1,500
$7,199 ………… Interest Points
$179,980 ………… Down Payment
============================================
$208,177 ………. Total Cash Costs
$46,300 ………. Emergency Cash Reserves
============================================
$254,477 ………. Total Savings Needed
The property above is available for sale on the MLS.
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Cost of Ownership Analysis
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