The American Nightmare... Home Ownership vs. Home Rental

Submitted by SadInAmerica on Mon, 07/28/2014 - 3:02am.

misc-Buying VS-Renting-Home

The home ownership scam enslaves millions of people every year. It is part of the standard programming that everyone receives when attending government funded public school. Unfortunately it is almost always the wrong financial decision to make. For most people, renting a place to live while saving for a home might be a better choice.

Here are some reasons:

1.   You'll Save Lots of Money

Most people forget that losses get amplified as well as gains when buying real estate with a loan. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he's bankrupt in the real world.

2.   Moving Costs

Consider the cost of moving. The cost of selling a house every time you move is 6% to buy plus closing costs. etc. for a loan. Your initial payments are mostly interest (even if you have a mortgage which will pay off the total within 30 years).

So if you have to move less than every eight years, or if you think you may have to move in the future to look for a better job (which most do), then renting is a much better deal.

The "average American" makes 11.7 moves in a lifetime (based upon current age structure and average rates of moving by age between 1990 and 1993).

By age 4, an American can expect to have 10.8 moves remaining. At age 19, 9.2 moves can still be expected. But by age 44, only 3.1 moves remain.

The actual mobility experience of individual persons, of course, will vary from these average numbers. In addition, since these moves are not evenly distributed throughout that average American's life, we cannot calculate an average length of stay in a particular residence. (http://www.census.gov/population/www/pop-profile/geomob.html)

House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $600,000 house, that's $36,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

3.   Freedom to Move

When you do have to move, you can do so without any of the worries of selling a house at a loss so that you can move into a new house.

4.   House Prices Still Going Down

House prices still have a long way to go down (as of Nov 2008). The Greater Depression has not hit yet, and will not until the derivatives mess is sorted out.

5.   Property Taxes

And what about property taxes? Renters don't have to pay them. Property taxes have soared in many areas. There should be a ceiling for greedy councils, but at the moment that has not been done. Make sure you check out the different property taxes for different counties. It varies enormously (Eg a couple who were paying $7,000 a year in Florida now pay $1,000 a year in Tennessee). It would be great if someone would make a website of the best counties for property taxes.

6.   Investments don't have expenses that houses do.

Owners must pay taxes simply to own a house. That is not true of stocks, bonds, or any other asset that can build equity. Only houses are such a guaranteed drain on cash.

Owners must insure a house, but not most other investments.

Owners must pay to repair a house, but not a stock or a bond.

Make sure the the money you save in rent really is put into an investment. Don't just spend it on things which don't save you money or help to bring in an income.

7.   You Won't Waste Money on Interior Decorating

One big reason why people save money when they rent rather than buy is because they don't waste money on 'improvements' that don't add to the value of the house, such as painting rooms different colors, buying beautiful curtains etc. Even a pool may add to the value of the home, but you won't make a PROFIT on it.

8.   You Can Build Your Own Instead and Save 50% When You Do

Forget about what builders tell you it cost them to build a house. It costs a builder about 50% of what he sells a house for, without having to lift a hammer. Here is some information that will help you, even if you currently know nothing about building a house.

i) "How to build your home in 2 years".

ii) How to build a debt free home

iii) Home Building Manual. 500 steps to building your own home.

iv) Buildmax.com. This website is the best we have found for financially backing your 'owner-builder' project.

9.   You Can Choose Concrete Instead of Wood

If you build a house yourself made out of CONCRETE instead of buying one made out of wood, you not only save 50%, you will also have a house -

  • Made of the same material as 5 star hotels.

  • That is safer against storms, hurricanes and tornadoes.

  • That can't rot.

  • That can't get termites (if you also do the interior walls).


The following is from http://patrick.net/housing/crash.html

I highly, highly recommend you visit his site.

Who says house prices can't go lower?

Real estate related businesses, because they don't make money if buyers do not buy. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now.

1.)   Buyers' agents get nothing if there is no sale, so they want their clients to buy no matter how bad the deal is, the exact opposite of the buyer's best interest.

Agents take $100 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer.

2.)   Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible.

3.)   Banks get origination fees but sell most mortgages, so they do not care about the potential bankruptcy of borrowers, and will lend far beyond what buyers can afford. Banks sell most loans to Fannie Mae or Freddie Mac.

The conversion of low-quality housing debt into "high" quality Fannie Mae debt with the implicit backing of the federal government is the main support for the housing bubble. That is ending as Fannie Mae shrinks.

It remains true, however, that banks are not required to get any appraisal at all for loans they sell to Fannie Mae or any government-guaranteed loans. This encourages banks to overstate values and sell bigger loans to Fannie, defrauding taxpayers.

Even for the "jumbo" loans that banks cannot sell to Fannie Mae and Freddie Mac, they have a motive to lend beyond what buyers can afford. Banks designate interest as "income" whether they receive it or not.

As long as borrowers do not actually default, additional interest owed is counted as bank income, and banks can claim higher "earnings". That is going to end when those borrowers cannot even make the principal payments.

4.)   Appraisers are hired by mortgage brokers and banks, so they are going to give the appraisals that brokers and banks want to see, not the truth.

5.)   Newspapers earn money from advertising placed by Realtors®, so papers are pressured to publish the Realtors'® unrealistic forecasts.

Worse, Realtors® have a near-monopoly on sale price information, and newspaper reporters never ask Realtors® hard questions like "how do we know you're not lying about those prices?"

The result is an endless stream of stories which quote David Lereah of the NAR saying it's a good time to buy, as if there were some news in hearing salesmen say that you should give them your money. To be optimistic about this market takes a real estate "professional". Everyone else speaks the truth too clearly.

6.)   Owners themselves do not want to believe they are going to lose huge amounts of money.

What are their arguments?

* 1. "There are great tax advantages to owning."

FALSE. It is much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house, even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month.

That same house would cost about $700,000. Assume 6% interest we can see that a buyer loses at least $4,936 per month by buying. Renting is a loss of course, but buying is a much bigger loss.

 

Renting:

* Rent: $1,800

* Monthly Loss: $1,800

 

Buying:

* Property Tax: $486 ($729 per month at 1.25% before deduction, $486 lost after deduction.)

* Interest: $2,333 ($3500 per month at 6% before deduction, $2333 lost after deduction.)

* Other Costs: $450 (Insurance, maintenance, long commute, etc.)

* Principal loss: $1,667 (Modest 3% yearly loss on $700,000. Reality will be much worse.)

* Monthly Loss: $4,936

 

This is a very conservative estimate of the loss from owning per month. If you include a realistic decline in house prices, as in this rent-vs-own calculator, you'll see that owning right now is a very poor choice. Here's a more optimistic calculator which ignores price changes entirely.

Remember that buyers do not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn.

That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest.

Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement.

House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. It is much cheaper to rent the house than to rent the money.

Then there's earthquake and flood insurance. It's really expensive, so most people just skip it and risk everything on the chance that no earthquake will happen.


10 Reasons It's A Terrible Time To Buy An Expensive House

1)  Because house prices are in expensive areas still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer's annual income with a 20% downpayment.

Landlords say a safe price is set by the rental market; annual rent should be at least 9% of the purchase price, or else the price is just too high. Yet in affluent areas, both those safety rules are still being violated.

Buyers are still borrowing 6 times their income with tiny downpayments, and gross rents are still only 3% of purchase price. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow.

Salaries and rents prove that affluent neighborhoods are still in a huge housing bubble, and that bubble seems to be getting more dangerous by the day.

On the other hand, in some poor neighborhoods, prices are now so low that gross rents may exceed 10% of price. Housing is a bargain for buyers there. Prices there could still fall yet more if unemployment rises or interest rates go up, but those neighborhoods have no bubble anymore.

2)  Because it's usually still much cheaper to rent than to own the same size and quality house, in the same school district.

In rich neighborhoods, annual rents are typically only 3% of purchase price while mortgage rates are 4% with fees, so it costs more to borrow the money as it does to borrow the house. Renters win and owners lose!

Worse, total owner costs including taxes, maintenance, and insurance come to about 8% of purchase price, which is more than twice the cost of renting and wipes out any income tax benefit.

The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you'll know it's pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk.

The basic buying safety rule is to divide annual rent by the purchase price for the house:

* annual rent / purchase price = 3% means do not buy, prices are too high

* annual rent / purchase price = 6% means borderline

* annual rent / purchase price = 9% means ok to buy, prices are reasonable

So for example, it's borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That's $12,000 per year in rent. If you buy it with a 6% mortgage, that's $12,000 per year in interest instead, so it works out about the same.

Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things.

It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling housing prices. Subtract HOA from rent before doing the calculation for condos.

Although there is no way to be sure that rents won't fall, comparing the local employment rate (demand) to the current local supply of available homes for rent or sale (supply) should help you figure out whether a big fall in rents could happen. Checking these factors minimizes your risk.

3)   Because it's a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate.

Since interest rates have nowhere to go but up, prices have nowhere to go but down.

The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines.

To buy an expensive house at a time of low interest rates and high prices like now is a mistake.

It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way.

A low price lets you pay it all off instead of being a debt-slave for the rest of your life.

As interest rates fall, real estate prices generally rise.

Your property taxes will be lower with a low purchase price.

Paying a high price now may trap you "under water", meaning you'll have a mortgage debt larger than the value of the house. Then you will not be able to refinance because then you'll have no equity, and will not be able to sell without a loss.

Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.

You can refinance when you buy at a higher interest rate and rates fall, but current buyers will never be able to refinance for a lower interest rate in the future. Rates are already as low as they can go.

4)    Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loans. This means most banks are still actually bankrupt. Since the banks have friends in Washington, they get special treatment that you do not.

The Federal Reserve prints up bales of new money to buy worthless mortgages from irresponsible banks, slowing down the buyer-friendly deflation in housing prices and socializing bank losses.

The Fed exists to protect big banks from the free market, at your expense. Banks get to keep any profits they make, but bank losses just get passed on to you as extra cost added on to the price of a house, when the Fed prints up money and buys their bad mortgages.

If the Fed did not prevent the free market from working, you would be able to buy a house much more cheaply.

As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks "extend and pretend" that their mortgage loans will get paid back.

And of course the banks can simply sell millions of bad loans to Fannie and Freddie at full price, putting taxpayers on the hook for the banks' gambling losses. Heads they win, tails you lose.

It is necessary that YOU be forced deeply into debt, and therefore forced into slavery, for the banks to make a profit. If you pay a low price for a house and manage to avoid debt, the banks lose control over you. Unacceptable to them. It's all a filthy battle for control over your labor.

This is why you will never hear the president or anyone else in power say that we need lower house prices. They always talk about "affordability" but what they always mean is debt-slavery.

5)    Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well.

If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.

The simple fact is that the renter - if willing and able to save his money - can buy a house outright in half the time that a conventional buyer can pay off a mortgage.

Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little.

Leveraged housing appreciation, usually presented as the "secret" to wealth, cannot be counted on, and can just as easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.

The higher-end housing market is now set up for a huge crash in prices, since there is no more fake paper equity from the sale of a previously overvalued property and because the market for securitized jumbo loans is dead.

Without that fake equity, most people don't have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you're still making mortgage payments on an underwater house.

It's worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby's corruption of US legislators.

On a $300,000 house, 6% is $18,000 lost even if housing prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.

6)   Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling.

Prices in the housing market, even now, are entirely a function of how much the banks are willing and able to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property.

Banks have been willing to accomodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.

7)    Because there is still a massive backlog of latent foreclosures. Millions of owners stopped paying their mortgages, and the banks are still not forclosing on all of them, letting the owner live in the house for free.

If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don't like those costs.

If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now.

To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Right now, those foreclosures will wash over the landscape, decimating prices, and benefitting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!

8)   Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald:

"We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from.

Well the truth is that it was being stolen from the next generation. Houses price increases don't produce wealth, they merely transfer it from the young to the old - from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize."

House price inflation has been very unfair to new families, especially those with children.

It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on.

Your debt is their wealth. Every "affordability" program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it's just pushing the reckoning into the future.

To really help Americans, Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even more important is eliminating the mortgage-interest deduction, which costs the government $400 billion per year in tax revenue.

The mortgage interest deduction directly harms all buyers by keeping prices higher than they would otherwise be, costing buyers more in extra purchase cost than they save on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra $39,000 in purchase price.

Subsidies just make the subsidized item more expensive. Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia have no mortgage-interest deduction for owner-occupied housing. It can be done.

The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.

9)   Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third have zero retirement savings. The oldest are 66. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.

10)   Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going.

They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.

 

March 26, 2014 - posted at HealthWealthHappiness

 

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Submitted by SadInAmerica on Mon, 07/28/2014 - 3:02am.