bostonbubble.com

[Renting in Mass]

Here's a typical stinker in the area I'm looking at:

http://www.redfin.com/MA/Wrentham/211-Beach-St-02093/home/11504049

It just sold for 305k, which is basically the assessed price minus the fact that it needs new siding, floors, windows, and kitchen counter tops. It's on a fairly busy street and hadn't been updated at all since the 70s.

[GenXer]

[john p]

This is coming back to the buying versus renting analysis.

Today, the most important factor is RISK. The banks are trying to limit risk and are reverting back to benchmarks and hurdles that most can't meet. They are passing on the bailout money to people who don't need the help to begin with and are collecting huge fees for themselves. The current policy isn't working.

Unemployment is a huge risk so emergency fund is paramount. If saving for a down payment wasn't bad enough, now having money set aside for a potential 16 month layoff is impossible for some. Because my profession was volatile I resigned myself to this reality at a young age. Being laid off is quite common in my profession because once a project is complete, many firms let go a lot of the manpower and then ramp up when they have their next one up and online.

The next big risk is that the starter housing stock is tired and maintenance can be upwards of 3-5% per year. If a roof, or furnace goes you need money to pay for it and there isn't a Home Equity Line of Credit to draw from anymore.

The next big risk is taxes. Taxes will need to go up in order to pay for all of this Stimulus Spending. Although Obama said that he wasn't going to raise taxes, he and his Administration are hammering away at how they underestimated the "mess that they inherited". Deval Patrick told us that he was going to LOWER our property taxes. Imagine believing him and developing your personal financial plan based this assumption. The fact that we don't even expect to hold our leaders accountable and even expect a degree of dishonesty from our politicians destines us to get these used car salesmen and poverty pimps. What is even worse is that people who call him out on his dishonesty actually get attacked.

The next big risk is our currency and inflation. Although our Nation has been purchasing Treasuries which indirectly keeps the mortgage rates artificially low, even when we stop doing this who knows what will happen. We have to keep in mind what other world economies are doing and in the big picture we might be the best option as crazy as that sounds.

Last, is Government Interaction. This is a total wildcard. Who knows if they will subsidize a market like the $8k first time homebuyer deal or not. If they monkey with the mortgage interest tax deduction all bets are off; even if you met Gen-Xer's benchmarks you could be in trouble. It is in the realm of possibilities that the current generation in power the "Me Generation", the most selfish and irresponsible generation in American History is capable of doing this. This generation enjoyed a much better economy and bought multiple homes with this tax shelter and further used this tax shelter to buy luxuries through Home Equity Lines of Credit. So instead of salting away money for Medicare or Universal Health Care or maintaining roads, they let themselves buy boats and trips using the tax shelter set aside for home purchases. Now that they have trashed the economy they might strip that from the future generations. This "Me Generation" is capable of this. They have let every industry and professional standard erode and have been self serving from the beginning. The "Me Generation" being in power is a big wildcard.

[GenXer]

Of course this is all about risk. It's never been anything else

You can either buy insurance or you can insure yourself by having adequate savings - the choice is yours. If you don't do it - the more you engage in risky things (including getting a job, a mortgage, being a target of lawsuits, etc), the more likely you are to be subject to losses.

[john p]

So that tips the scales towards renting?

The Brave New World idea that Boston IT'er is suggesting is worth considering. I do think that prior generations have inflated themselves out of debt in the past and this will most likely happen again. Buying, long term puts you in a situation where your house will be paid off in 25 to 30 years. Renting an extra decade just pushes that end date off. I mean there are people in their 50's taking out 30 year notes....

[GenXer]

Total cost of buying is prohibitive compared to that of renting over 30 years, and yet people still buy. You can cook a frog slowly - and you can convince anybody that just because they take a loan, they can all of a sudden afford anything. There is something wrong with this logic. I'm actually leaning towards buying a house with cash. If you can - then you can truly afford it. Otherwise, good luck - you'll need it.

Like you said, there are parts of the country where buying is on par with renting, but I'm willing to bet that few if any want to live there. A 30-year loan will cost you 2x what the house price was, roughly, even with 20% down. And that does not include all the money you spend on everything else. Total cost for owning most places in MA is much higher than renting long term, but that doesn't mean you never ever buy.
You can time the market a lot better when you are renting, as your lease is only 1 year, and especially now the rents are falling fast. Try doing that while living in a house that's under water.

If you want to get ahead of everybody, renting for a while is not a bad idea, even if you can afford to buy. When you can afford not to work for a couple of years, or change careers when you feel like it, then you can buy. Most people put themselves at risk needlessly, as if there aren't other risks to worry about.

[Boston ITer]

[john p]

You're still burning a lot of cash renting.

Take your mortgage if you buy, minus the tax deduction and then compare it to your rent. You lock your mortgage in. Ten years from now that rent could be a lot more.

[Boston ITer]

[GenXer]

Renting vs. buying is like investing in stocks vs. bonds. Stocks can do better, but investors themselves almost always do worse (than bonds). Renting is like owning bonds. You know what you will get, and if bond prices rise or fall, you are still ok because they won't move very much over several years. Owning a house is a huge risk and financial liability, especially because you are leveraged, and can lose your entire downpayment (100% of your investment) if house prices move up or down only 20% (a 5:1 leverage).

You can ALWAYS move somewhere where rents are cheaper. Even now rents are plunging and there are many more places to rent, even in Newton. You can rent a 1b, 2b, 3b, whatever you want. When prices come down and you can afford it you can rent a luxury apartment, like balor123 is doing.

If you are stuck, you can rent something much cheaper. You can't do that once you are stuck with a fixer-upper house. It may seem that $300k is not a lot, but it is, considering the expenses you will have given that you bought an old house.

The problem is, all of that is clear in hindsight for most people, and most people are optimistic (and quite oblivious to future costs they will incur). This is a classic problem of making decisions in the precense of future uncertainty, and most poeple simply do it very badly. Think about it - renting is about as low risk as it gets. You are paying a PREMIUM for having a low risk investment. Look at renting as portfolio insurance - a premium you pay for keeping the REST of your portfolio safe (i.e. for NOT having to plunge head first into a very expensive house purchase, which we already determined would drain the savings of most people.

Saying that buying bonds is a waste because you are not getting the return stocks had historically is silly at best - you are buying a steady return of your principal plus interest, while stocks can take 90% of your principal away in a couple of months. The same way buying a house can bankrupt almost anybody given the right circumstances (which is not as impossible as people thought).

[Boston ITer]

[john p]

I am getting the message about mobility and flexibility and how that relates to employment.

It is hard to "settle down" when people don't stay in one company for as long as in the past.

Beyond that, having to move further and further out is ok if you work near North or South Station, but if you then have to train it or get some other area you're kind of screwed.

If you lived in Bolton, that might be fine to get to say the Western Part of Boston, but what if you got a great opportunity in Quincy? I think as young people started to get the message regarding the value of mobility, they started to gravitate right in the core and lived right in Boston, where prior generations wanted the suburbs.

I think there will be big pressure on the schools in the City to improve. I actually think that Obama is absolutely and totally right about Education. He understands that the Democrats need to win the urban areas and if he wants the eggheads to live in the City, they need better schools for the future eggheads. He was a hard core student so he values the values necessary to compete and succeed. I just wished he had more experience in the private sector where he would have had to make something and compete in a free market so he would have similar insight on the values of industry and capitalism. I think if he did, he wouldn't vilify Capitalism; he'd be having the same type of attitude he has towards Education (just win baby).

[GenXer]

Exactly. Well put - unemployment insurance. The problem is that people never see themselves out of work. Its all the others that lose their jobs, and not them. And while I hope that's true, it has been a matter of luck, almost. What if your $150k a year job is now a $75k a year job, and the $750k house that you bought is now too expensive to maintain?

Your risk is not the probability of ONE event sinking you, but the probability of event #1 times the loss due to event #1 plus the probability of event #2 times the loss due to event #2, and so on, until you sum over all of the potential expected losses. With a house, it is not one thing, but multiple, and if you own it long enough, you are bound to see something pop up sooner or later - risk begets loss (and gain). You simply don't want to be taking risks while utterly unprepared (which is true for most people) while fooling yourself about the magnitude the risks you are taking.

[Boston ITer]

[Boston ITer]