bostonbubble.com

[Comma]

The obvious problem with the analysis here is the assumption it is based on, that people who buy 300k dollar homes, have that 300k dollars to do what they wish with. However, that’s not true, and less true today than in days past. In days past most individuals had 20% for a down payment aka 60k. Today it is common to have less of a down payment. The real question is - - is it better for the average American who is barely making it, to put 1200 toward rent and not invest in the stock market (thus “throwing the money down the drain”), or is it better to put that 1200 toward a mortgage and (assuming the author is correct in his analysis) get a 0% return and not invest in the stock market. The answer is obvious. Furthermore, I find the more logical explanation for a possible bump in renting by high income earning individuals is more likely due to second homes, vacation rentals, etc.

[admin]

Note: For the benefit of others, I believe this thread's author was referring to the article Why rent? To get richer which was recently posted to the news section. I'd like to add the ability to directly comment on news items like this at some point in the future.

[Comma]

Yes, but the total amount of equity you have built in the property after 1 year is hypothetically 12k (I realize I'm being loose with the numbers). The costs associated with the mtg (like insur., taxes, etc.) should be subtracted from this number. So as long as the costs aren't equal to or more than 12k, you have "built equity" by "buying" a home. If you rent at the same cost you have lost all 12k and built no equity.

[admin]

[Guest]

"To make the numbers easy, let's say that the full mortgage payment is $2,500 (this is totally hypothetical). $1,500 of that goes to interest, and $1,000 goes to equity. Compare that to spending the same amount per month while renting: $1,200 would go to rent and $1,300 would go to equity in an asset class of your choice (the article recommends stocks, but that is up to you). "

In that example, you are putting 1,000 toward equity and therefore building equity. Furthermore, the % of interest being paid decreases over time, and thus equity being built will increase over time as well.

In addition, your hypothetical suggests that you can rent housing for 1200 that a mtg payment costs are equal to 2500. Using a loan calculator on realtor.com, with a 5k down payment and assuming that there is an additional 6k in other expenses (which I find highly unlikely, at least initially) the total amount borrowed is about 340k for a mortgage payment of 2k.
I just looked up on realtor.com and found a newly rehabed place with 3 bdrms and a 1100 sq ft in Jamaica Plain near the pond for 330k (asking price). As I have been looking for a rental in and around Boston for the past year (partly out of need and partly out of real estate interest in general) and I would be shocked to find a 3 bed room in JP for 1200. More likely 1800-2100. (I'm not saying that it's right, it's highly overpriced both rentals and sales). But it just shows that a potential renter won't have 1300 in saved income to invest, if they rent, at least not in and around Boston.


"Here's another way to think about it - what if you bought a home using an interest only loan? "

Of course in an interest only loan, no principal is being paid off and therefore no equity is being built and my arguement does not apply.

[admin]

[Comma]

I agree with, yes in some situations it may be beneficial to rent rather than buy. However, I think as a "truism" it doesn't work. Far more often it is better to buy than rent. But maybe I just misunderstood the point of the article, that it MAY sometimes be better to rent.