Homebuying advice?

[Cyclonin]

You are correct that real estate is an investment with risk associated with it. But over time, its proven to be a very solid investment.

What is the value of your home? Because it would be very, very difficult to pay $230,000 for a house and in 10 years its only worth $180,000. Especially in the Midwest.

Agreed, maybe a percentage would be a better estimate, so 50k of 230k is ~22%

 

[cowgirl836]

I think the homebuying process causes her to have a mental breakdown sometime in 2015 and we never hear from her again after that.

don't sound so hopeful

 

[KnappShack]

You are correct that real estate is an investment with risk associated with it. But over time, its proven to be a very solid investment.

What is the value of your home? Because it would be very, very difficult to pay $230,000 for a house and in 10 years its only worth $180,000. Especially in the Midwest.

I'm in California and fairly close to the coast. It would be difficult to find much in that $230,000 range.

So the numbers are a little bigger here and the market is historically more volatile than the Midwest. But I'm living proof that you can be down $50,000 after ten years. But I was down $170,000 after 8 years so things are looking up! Many just walked away, but I rode out the storm (so far) . My Texas property didn't drop nearly as much. It's a market by market thing. So if you're putting your signature on those loan docs just be aware that the ride can be rough.

Personally I have always advocated buying, but it's very much a case by case decision.

 

[CyArob]

we need a cybookie on when dh and cowgirl will actually get a house. 2016?

If they build a house, I assume their lot will have some rare bug which, with permitting and environmental studies makes it so their house gets delayed until at least 2020.

 

[cycloneworld]

I'm in California and fairly close to the coast. It would be difficult to find much in that $230,000 range.

So the numbers are a little bigger here and the market is historically more volatile than the Midwest. But I'm living proof that you can be down $50,000 after ten years. But I was down $170,000 after 8 years so things are looking up! Many just walked away, but I rode out the storm (so far) . My Texas property didn't drop nearly as much. It's a market by market thing. So if you're putting your signature on those loan docs just be aware that the ride can be rough.

Personally I have always advocated buying, but it's very much a case by case decision.

It's really not a case by case decision. 9 times out of 10 the math will favor home ownership if you are going to stay in your house for 10+ years. Other factors (length of stay, market location, etc) may make it a case by case decision for the individual family, but most of the time the math will win.

You mentioned you are down $50k after 10 years but what is that on a percentage of your home price basis? Is it more than 22%?

Unless you make a horrible deal or you live in a very volitile market, its very difficult for your home to lose 22% of its value over 10 years.

Also, there can be huge upsides to volitile market's as well. That $230k house could be worth $400k in 10 years too.

 

[KnappShack]

It's really not a case by case decision. 9 times out of 10 the math will favor home ownership if you are going to stay in your house for 10+ years. Other factors (length of stay, market location, etc) may make it a case by case decision for the individual family, but most of the time the math will win.

You mentioned you are down $50k after 10 years but what is that on a percentage of your home price basis? Is it more than 22%?

Unless you make a horrible deal or you live in a very volitile market, its very difficult for your home to lose 22% of its value over 10 years.

Also, there can be huge upsides to volitile market's as well. That $230k house could be worth $400k in 10 years too.

At the bottom of the market my place lost 40% of the purchase price. From the peak of the market I was down almost 50%.

I sit roughly 10% down at the moment. After a decade of paying on the home I'm about break even mortgage wise. If I factored in the tax benefit I'm ahead. I will really be ahead as the principal falls vs cost to rent (which is out of control)

The items you list above are exactly why it's a case by case decision. Length of stay, freedom to renovate, risk aversion, etc. I'm with you in recommending the home purchase. ...in general. However, renting can be a viable option if you think you aren't settled, cannot take the responsibility of ownership or are potentially risk adverse as an investment

 

[dmclone]

Ok, I'll bite.

10 year renter
$1,300/mo for 10 years = -$156,000

10 year home owner
$230k purchase price of house, 20% down (~$900 per month payment)
$4,500 annual property taxes
$1,000 annual homeowners insurance
Total monthly payment = $1,360

Down payment = -$46,000
$1,360/mo mortgage payment for 10 years = -$163,000
Repairs/Maintenance = -$30,000

Total interest paid = approx. $67,000
Total property taxes paid = $45,000
Tax benefits = +$39,000

Mortgage balance after 10 years = $148,000

House sold = $260,000
Realtor/selling fees, 7% = -$18,000
Net = $242,000
Balance owed = $148,000
Net gained = +$94,000

Total Ownership Cost = -$46k (down payment) + -$163,000 (monthly payments) + -$30,000 repairs + $39,000 (tax benefits) + $94,000 (house sold) = -$106,000

Summary
Renter = $156,000 loss or $1,300/mo for 10 years
Homeowner = $106,000 loss or $883/month
$417/mo savings by owning a home or $50,000 over 10 years. Pretty good savings of 32% for home ownership over renting.

A few things not included:
1. Average home appreciate is 2.5-3% per year. At 2.5%, the home would be worth $294,000 and not the $260,000 you used. That would be another $34,000 advantage for the home. Or another $283/mo savings which would make the home ownership option worth $84,000 more than the renting option.
2. There is almost a 0% chance your home loses $50,000 (or 20%) in value over a 10 year period.
3. You don't control how much your rent will increase. And it's a guarantee that it will. Your mortgage payment will never increase and your property taxes and insurance will only marginally increase over time.

Thanks for doing this. It is a good example of the costs during a low interest rate period , combined with a 2-3% rise in home values, and the borrower coming up with 20% down payment.

On the other hand, if we're assuming that both borrowers had $46k laying around to put in a down payment than I can assume that the renter put $46k in a S&P 500 fund and after 10 years of earning 6% it's now worth $75k. Now that $50k profit has shrunk to $17k.

Once again, thanks for putting together these numbers.

 

[dmclone]

BTW-I live in Johnston and my home has increased in value by .5%/year on average since I bought it 10 years ago.

 

[BirdOfWar]

This is what we're doing to a degree. I'm an architect so we looked for a crappy house in a great neighborhood. We also sought out a house that was big enough for us, with a good floor plan in order to minimize the amount of expensive work we'd be doing.

As I'll be doing most of the work with my wife and dad, we opted to only put 5% down and use the remaining savings to upgrade the house. Construction loans are a bear as you have to hire a licensed GC which would eat half the loan in labor costs. Since we can do the work ourselves, we get a lot more bang for the buck when we renovate.

The house we're in now is worth $250k now per the appraisal, and we got in for $235k. I'm probably going to drop 50k into it over the next couple of years at which point I'll have it reappraised and refinanced. I fully expect the house to be worth $350+ (neighborhood averages) with the work (new siding, new windows, egress window to add 4th bedroom, new chef's kitchen, newly refinished basement and new landscaping).

In the end, I'm going to spend about 5k in PMI, and save about 40k in labor.

Constanza! When did you get out of latex sales?

 

[cycloneworld]

Thanks for doing this. It is a good example of the costs during a low interest rate period , combined with a 2-3% rise in home values, and the borrower coming up with 20% down payment.

On the other hand, if we're assuming that both borrowers had $46k laying around to put in a down payment than I can assume that the renter put $46k in a S&P 500 fund and after 10 years of earning 6% it's now worth $75k. Now that $50k profit has shrunk to $17k.

Once again, thanks for putting together these numbers.

If you run the numbers with a 5% down payment and PMI, the numbers will shrink but it won't be a huge amount.

And you have to compare apples to apples with investments. If you are getting an average of 6% from the stock market over 10 years, you are more than likely to see much more than a 0.5%

BTW-I live in Johnston and my home has increased in value by .5%/year on average since I bought it 10 years ago.

Amid the worst recession since the Great Depression.