Why It's Better to Rent than Buy
by Stephanie Relfe
Nov 1, 2008
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 intial payments are mostly interest (even if you have a mortgage which will pay of 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 celing 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.
7. 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 free house". This fantastic book shows you the truth of building a house and how to save 50% on the cost, without touching a hammer.
ii) Home Building Manual. 500 steps to building your own home.
iii) Buildmax.com. This website is the best we have found for financially backing your 'owner-builder' project.
8. 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
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Monthly Loss: $1,800Buying:
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.)
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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.
From http://www.housingbubblebust.com
