Yes this is an old question, because it is no longer true. With the prices where they are and the rates as low as they are it is less expensive for most people to buy a home. The catch is that it is harder for most people to qualify.
Yet there are some ways around those problems. For example if your credit is not perfect or you don't have enough money down we may be able to get you in under a FHA loan.

By the way there are some homebuyer progroms that have come out requiring a down payment of only 1/2 of one percent down. An amount that will probably be covered by the $8000 tax credit.

Yes, I just noticed that this thread is over a year old. As my blog post just below points out, the two figures - renting vs. buying - are closer now than they've been in quite a number of years.

“Scott” is reviving old threads in order to flame. Ignore him.

Scott is a blog spammer, he created the fake profile for bashing realtors and posting BS stats and reasons not to own.

Look at his history of posts, his profile was created today yet has been posting negative false comments about me in many postings stating I've been spamming the blogs here for weeks!!! What?

Sorry about that Jim Gleason.

You're wrong on yet another subject, Scott, although perhaps that is the case in Greensboro, S.C.. Here is a blog post of mine from over a month ago, citing National figures:

http://southorangecounty.wordpress.com/2009/02/25/more-signs…

Jim - Your question is a reasonable one.

A person may choose to buy a home for several reasons despite the disparity between renting and owning.
1. First, some people simply want a place that they own, where they have control of the property and everything down to the color on the walls.
2. Other people want to build equity - a tough thing to do in today's market.
3.Some want to lock in the cost of their housing. Rentals will continue to increase over the years, but if you purchase a home with a 15 or 30 year fixed, fully amortized loan, the payments will be the same - the only difference being the slight increase in property taxes and homeowners' dues if you have an association.
4. There may be a tax shelter or savings depending upon income levels.

There are many other reasons of which the above is just a sample.

Your point that prices are likely continuing down is a valid one, and I believe that a person needs to look at many factors before deciding if it is the right time to buy. There are pros and cons to this market just as there were in the sellers' market we had a few years ago.

There are plenty of REO's out there that nearly pencil equal to renting. We just bought one and with the tax break, it's break even vs renting this place. We happened to luck out on rates. If we did the loan today, it would be more than renting, but not any where near 2-3 times. Some long time owners are pricing their homes right as well, but the majority of non distressed sellers are still asking far too much. If you look hard enough, you might be able to find something that doesn't cost a whole lot more than renting.

Rents have gone up considerably in the last 5 years. Properties priced in early to mid 2003 prices unadjusted for inflation will likely not be much more than renting.

Paul

You make some great points but I do want to discuss a few things....and let me preface this by saying that I'm not saying now is the time to buy or not.....just stating some facts.

First, lender guidelines have relaxed dramatically. 1 in particular has eliminated their 10% declining markets" factor and their 30 year fixed rate for Jumbo loans is now only .1875 higher than their Conforming (both under 6.5%). Further, they have just this week brought back their first "stated income" program in over a year.

Additionally, being an internet driven real estate company, we track a lot of statistics that many are not privy too. 1 neighborhood in particular has gone from 34 active listings, 1 back-up, 1 pending 7 expired, and 3 Sold listings as of December. Today there are 13 active listings, 2 back-ups, 2 pending, 1 expired and 14 sold. A pretty dramatic swing for a lower middle class neighborhood. Similar results are found in about 37% of the neighborhoods we track.

Is this in part Summer buyers vs Holiday buyers...probably in part. Could it be a clear sign that things are improving.....possibly. More than anything, the ones that have sold have been reduced in price about 25% over the last few months. The median home price in this neighborhood is now $389,000. With 10% down payment, a mortgage would be about $2,100 a month. Rent on these same homes in this neighborhood is now $2,000 a month. I don't know and don't claim to know but there are a lot of indicators that the market may be approaching some normalization. Further, virtually all of the rest of the Neg-Am, and Teaser rate loans will be resetting within 9-12 months. I would say that there is still some downward movement ahead, but it is getting close.

Finally, the P&I payment on a $650,000 loan at 6.125% is $3,949 a month. At 7.5% percent, it is $4545 a month....over $214,000 more (amortized 30 years) on the same loan amount. Since you are watching the market, keep your eye on interest rates. It is a big part of the overall financial picture.

Finally, the 2003/2004 run up was very real to our clients that bought in the 1990's and sold 10 years later at 300% higher prices.

One thing is for sure, timing is in fact everything. I'm just excited that OC is starting to make sense for buying rentals again. :)

Paul....you make some great points in your response. I think it is very important for Buyers to buy for the reasons that make it right for them and not because a Realtor or a Mortgage Broker or a friend or a neighbor told them to! Buying a home should not be viewed in the same way as investing in the stock market. A home is the place you live and where you enjoy time with family and friends. If you finance the purchase correctly and pay the mortgage (not just the interest), you may eventually own an asset you can then pass along to your heirs. Buyers who are trying to spectulate about the future of the real estate market purely for the purpose of making a lot of money in a short period of time run the same risks as those who speculated about the dot.coms....some made millions and some lost everything. I believe the primary roles of a real estate professional are - help you find a home that you want to buy; negotiate the best price and terms possible and then help you navigate through the various stages of escrow until the home becomes yours. If at any time you, as a consumer, feel you are being sold.....your should find another agent!

I am a home buyer chiming into this discussion in reply to where some of the buyers stand in this current real estate bubble meltdown.

I am a 30-something attorney looking to buy a home probably somewhere in north Orange County/LA county. I have enough cash saved up/inherited for probably more than a 30-40% down on a 850K-1M SFH and don't anticipate any "problems" with getting a mortgage loan even with all the newly instituted ultra conservative lending criteria.

So what has kept me out of the markets for the past few years? The unprecedented bubble in the real estate market. I have enough experience in the financial markets to recognize a BUBBLE (as I also worked for a major Wall Street firm for a few years).

Similar to Hannah, I do NOT believe the equity built up during 2003/2004 to 2008 is real. With more foreclosures and inventory of homes to flood the markets for sometime in addition to the tougher credit lending criteria by banks, along with the cost of living getting higher with income levels not keeping pace, I don't anticipate submitting offers any time soon.

Every time a realtor says something like "...it is purely local and OUR local neighborhoods are DIFFERENT than the national trends..." or "...right now is a GREAT time to buy..." or "...okay so the real estate market is somewhat in a lull, but it will most DEFINITELY bounce in early 2009..." reinforces in my mind that realtors are mere sales persons who need to put food on their tables (which btw is understandable).

I anticipate that as long as the current "standoff"/disconnect between sellers/listing agents and the real value of homes in LA/OC exists, it will keep out many qualified home buyers out of the markets even longer.

Just chiming in,
Paul

Hannah,

When a listing agent represents a seller, it is the listing agents job to jusify the price. Would you, as a seller, hire a listing agent to tell buyers, "No, it isn't worth the asking price."? Sometimes, a listing agent simply walks away from listing if it is overpriced. Sometimes a sellers suggests that they "try the higher price" and "will come down in price if necessary." Sometimes a listing agent needs the buyer to voice the subject of price directly, and the the listing agent will take those comments back to the seller. The listing agent wants to sell the property for the highest price and best terms, and the listing agent knows that overpricing will ulitmately lead to a lower sales price. With that in mind, the lisitng agent will advise a seller to price competitively, so they won't be overlooked in favor of other properties, but will not publicly announce to buyers that they are suggesting their sellers reduce. Buyers often do not candidly voice their opinions to a listing agent. It's better for all that they do. The market is what the market is. These candid remarks can be delivered politely. I am not a suporter of crude sarcasm, but I am a strong supporter of honest feedback.

You actually sound like a very level headed buyer....one who has realistic expectations of data to support their decisions and appreciates analysis. Best of luck to you in your search.

I find that every statistical measure out there as flawed, so I'm a huge advocate of collecting as much data from many data sources, regardless of whether I agree with their methodology because somebody out there does. At the same time, we're in a down cycle and there is no statistical measure for the influence of the human factor in forcing prices down. And unfortunately you can't measure the impact of the "house prices are plummeting" news stories on the public's perception of what prices should or will be.

Historically, Southern California median prices (outside of the height of bubble prices) were at one point linked to median incomes. I realize there will be neighborhoods priced below and above. Clearly some neighborhoods will hold value much better than others, but there is usually some correlation to affordability levels for that neighborhood's target market.

In my opinion during the 80s/90s boom-busts, public perception had to have played a significant role in driving down prices. It's just not something anyone can predict. I've heard a lot of realtors talking about how well they know their market and what is likely to sell or not. They seemed to be in tune with the sellers, but were out of touch with what buyers are thinking. And I don't seem to be alone in this thinking as I've talked to other buyers at open houses as well as overheard conversations, even some chastising listing agents. They lost sight of the mantra "know thy customer." I even had to interview 14 realtors just to find one who didn't lose sight of this. And by the way, I didn't hire a pessimistic realtor, I hired someone with great negotiation skills and had a rosier outlook so that I could find a good middle-ground perspective.

Although prices have come down significantly on the median, my gut tells me it's still not the right time to buy. One reason is because of the massive run up in prices. Next, there aren't enough reasonable bank products to support the current high prices. Plus, my income is 3.2 times the median LA income, and that only gets me into an average neighborhood using traditional lending products. I've seen a lot of sellers come down in prices, but there are still a lot of stubborn sellers, assuming they aren't upside down. Probably the big sign for me will be the majority of sellers (including banks) come to the realization that the equity built in the last two years is not actually liquid so they lower their prices to a truer market value.

For example, I went to an open house (3/2, 1800 sqft, remodeled within last 2 years $799K asking reduced from $839K). There are two other comparable houses for sale on this block, one for $730K and another for $840K. A house (3/2, 1700 sqft, also remodeled in last 2 years) on the next connecting street, about 12 houses away, sold for $689K in 11/07. Each listing agent obviously justifies their house is better than the other and deserves the premium, but the problem is is that I've seen the previously sold house and it didn't look any better or worse than the houses on the current market.

I'm not looking for rock bottom pricing, I'm looking for a nice neighborhood at a fair price where I can get reasonable financing terms and not feel underwater in a mortgage. It just doesn't seem like that is out there yet. If this slow spring start is any indicator, I think sellers may come down more in line with reality.

Very good explanation of the Case-Schiller home price indices. Here's a link that for those who would like more info on this frequently referenced source.
http://www2.standardandpoors.com/spf/pdf/index/SPCS_MetroAre…
~~~~~~~~~~~~~~~
Thanks for posting that Deborah, I find the affordability index interesting.

The dataset for CS was set years ago. It was appropriate then. It is not now. CS is riding on the laurels of past credibility. If it was unbranded and had to prove itself as an unknown today, it would be laughed at.

Hannah, if I didn't take Case Shiller into consideration, I wouldn't have read the methodology behind it. Case Shiller even acknowledges that Real Estate, over time, has outperformed many other investment opportunites with less risk. My only problem with CS is that it takes such a broad geographical area into consideration (perfect for economists who want to see a big picture and don't need to be specific to neighborhoods) and that they have only been tracking data since about 1985. Real Estate is more local than it is broad (If it weren't, then homes would be priced the same in Corona del Mar as they are in Corona). While buyers should be aware of the broad situation, they can't expect those numbers to be more accurate in a particular neighborhood or tract than the actual comps.

If you look at the data I provided in the previous web reference, you will see both Median Averages Used (and a whole post on why I don't like median prices being used on a local level over a short amount of time) as well as Price Per Square Foot Data. If you click around you will find many other reports stating the facts for my area. As for Chuck Smiar, his tactics or approaches which I am not familiar with, are his business. If you don't like how he works, don't use him. Lawrence Yun is an economist, but show me ANY economist who has been accurate in predictions and I will share him/her with everyone via my blog.

What I am more interested in is your predictions. You have identified yourself as a Home Buyer in Los Angeles so that makes you "the market". What do you feel is going on? And, when you feel it is a good time to buy again, which areas will you look at? What do you need to see from the market or economy to make buying a home something you would want to do? (Anyone else who is a buyer, please add your opinions too.)

And herein lies the discrepancy between realtor forecasting and broader economic forecasting. Who's more reputable, NAR/CAR or Standard & Poor's? Case-Schiller gets their numbers from sales prices for individual homes over time. NAR/CAR bases their methodology on median prices. Both have major flaws, but only one is used by the majority of economists. As a realtor, maybe you've lost touch, but from a public standpoint, realtor statistics are not seen as objective. There is a reason Lawrence Yun has been wrong with mostly all of his recent predictions, and it's not helping his credibility. Look at your industry, look at people like Chuck Smiar, with his scare tactic sales approach, buy now or you'll be sorry. He's also been wrong with his we're at the bottom predictions. These are the kind of people you are lumped in with and your one-sided data only makes you look popular to home sellers looking to make huge profits and buyers who are gullible. If you were a smart realtor, you'd analyze all the data, and not ignore Case-Schiller, but incorporate it with CAR/NAR data, plus look locally and nationally at how much banks have tightened standards, factor in the weak dollar, overbuilding, plummeting consumer confidence levels, plummeting job landscape in Orange County (which is one of the worst situations in the nation according to Bureau of Labor Statistics).

Here are some historical prices for Orange County...

If you buy a house you can paint it any color you want.

I am always amazed at how out of touch many people are with the state of the market and how a goldfish has better memory. Does anyone remember the housing boom/busts of the 80s/90s? I realize housing falls in the Great Depression can only be read out in history books, but we had recent bubbles that burst very badly in recent memory. Most realtors now seem to hold on to the same arguments that the NAR and CAR had in 88-91 about why housing will rise and stay more expensive in Southern California. That bubble didn't deflate until around 97. I remember high end markets which realtors never thought would fall, like Bel Air, Beverly Hills, etc. took major dives, even around 50% losses.

Realtors seem to have a good feel of the very microeconomics of their real estate market at this moment, but are woefully ignorant of the macroeconomic picture. Of course Case-Schiller has it flaws, and nobody is saying that it doesn't. My main problem with Case-Schiller's index is that the data collection has big holes and doesn't paint an accurate enough picture in regional markets, especially on the way down, but to say it's worthless for individual markets is ridiculous.

The point of the Case-Schiller index is to give you a rough picture of where the market as a whole is headed, which is based on sound economic theorem. It is likely that Southern California prices will be out of line with national median affordability levels, but there is no way this market can sustain the insane differentiation between current income and housing prices without crazy loan products, which really aren't happening that much now.

According to DataQuick, Orange County as a whole lost 16.1% YOY in Feb 08. Is that worthless because it is all of OC vs. just Irvine? For right now, maybe. There is a reason that a Consumer Confidence Index is generated and plays a major role in economic forecasting. If the population at large in any market, especially buyers, thinks values in OC are worth at least 16.1% less, and real estate is worth only what someone is willing to pay for it, how long will it be until the price drops are in line with consumer expectations? At what point does the consumer say, okay that's enough price drops? At the current rate of decline, probably not long, but if history is any indicator, the correction will happen.

Jared - That's a great link. Thanks

You mean Case-Schiller doesn't include the new lennar houses built on the bomb range? Bummer. I bet that would have helped home values in Orange.

Newportfiji- Give Sandra a break.
After all, Suzanne researched this.

Sandra,
Very good explanation of the Case-Schiller home price indices. Here's a link that for those who would like more info on this frequently referenced source.
http://www2.standardandpoors.com/spf/pdf/index/SPCS_MetroAre…

Deborah Madey - Broker
Peninsula Realty Group - New Jersey

LOL. this is a great site. I get a sense of which agents are on my side and which aren't. And between the realistic agents and the delusional ones finding excuses why I should pay 20% more than I need to Thanks Trulia.

I've read the Index Methodology for Case-Shiller. Real estate is extremely local, so I don't understand why you are applying this index to every area. The LA Metro area while it includes Orange County also includes many other Inland Areas such as those of the Inland Empire. My numbers are strictly for the areas stated. You said yourself, every source of data has it's weak points which is why I think every source of data should be looked at, and then applied where it fits. Price per square foot historical data is what it is.

Case Shiller also leaves out sales of condominiums, R-2's & sold new construction. For my area, this is misleading since they comprise the majority of properties sold.

This index was established as a benchmark to monitor housing for an area "in general" since housing can be used to hedge investments in stocks, bonds and REITs. Even Case-Shiller shows that housing outperforms Bonds and Stocks with a lower rate of volatility.

From January 1998-December 2007, they state

Housing 9.31% rate of return with 2.77% volatility
Bonds 5.97% rate of return with 3.47% volatility
Stocks 5.91% rate of return with 14.73% volatility

REITs outperformed Housing with a 11.22% rate of return but 15.22% volatility

Case Shiller is great when you're talking about performance in regards to other investments, but isn't worth a whole lot when you are looking at individual neighborhoods and that was never it's purpose.

The 2006/2007 price per square foot chart is just that. My clients get their specific information one on one. At that point, we use the most recent 3 months worth of data and unlike Case Shiller, that data is as up-to-the-minute as the MLS is and customized to a specific area. If you would like a particular neighborhood or tract, let me know and I will put it together for you. Or you can check back on my blog from time to time. I do a 3 month update on my area at the end of each month.

I agree that we will continue to see prices decline in most areas for awhile (especially inland), while others will remain firm (that is mostly in the Luxury Markets).

Sandra, your comparison of sales in all of 2006 to all of 2007 is worthless at best to misleading at worst. I certainly hope you provide a better service to your clients then providing this type of information to attempt to show prices are remaining flat or increasing.

The problem with your methodology has nothing to do with the median versus mode differentiation. Your error is that you are taking information for entire twelve month periods and attempting to utilize it to show current price trends. That is you are taking ALL of 2006 and comparing it to ALL of 2007.

But the reality is that the data in the subsets changed during the stated period – prices in the later part of 2007 where different than the earlier part of 2007. Your may have missed it but a dramatic credit event took place in mid-2007 which impacted the market. Your results are further skewed by the reality that sale transaction volume slowed dramatically in the later part of 2007. Therefore, your “data” for 2007 transactions is more heavily weighted towards early 2007 transactions (when prices where higher) to the end of 2007 (when prices where lower). Further compounding your “analysis” is the lag time between a purchase agreement being entered into and a closed sale. Closed sales in February of a year actually more closely reflect the market climate about 6 to 8 weeks earlier.

For these reasons, when analyzing trends, those more statistically trained, would utilize a smaller time period for a comparison. That is, one would compare sales transactions from February ’07 to February ’08 to analyze a year over year changes. This methodology is imperfect, as the sales mixture may have changed from the data sets. However, it is much more useful of show trends. The following entities have reviewed data as to price changes “year over year” for Orange County and all are showing a material price decreases. I also provide their measuring date which are now several months old: Case-Shiller (LA/OC)-13.70% Dec. ’07; DataQuick -16.30% Feb. 22; First American (LA/OC) -15.43% Dec. ’07; Global/National City-10.97%4q/2007; CAR -11.60% Jan. ’08. This is “year over year”, prices are even lower today and from the peak.

Further prices decreases appear almost certain given the number of adults with jobs is declining, the number of home buyers is at historic lows, the number of sellers is more than twice the norm, forecloses and notices of default are at records levels, and credit standards are continue to tighten (pulling even more potential buyers out of the market). Simply stated, the real estate bubble will continue to deflate.

NewportFiji

Here is the Web Reference showing how the "median" price differs from the "average" price...

Wow, I take a couple of days away from this place to get over a cold and come back to a rattlesnake den...

Jim - You already know when I move from Corona del Mar, I will be going to La Jolla, I miss San Diego. Lucky me, we'll be neighbors... ;) (La Jolla was still in SoCal last time I looked at a map.)

NewportFiji - The data I used was based on average price per square foot between 2006-2007. I have a county by county and Orange County city by city breakdown in the web reference directly below this so you can see what happened with each city.

The entities you reference below, if I remember correctly when I read that data, use the "median" price change, which is completely different from the "average" price. I will add another web reference with an example showing the difference between the two.

Hey, NewportFiji, do I get a diploma from you with that cool new doctorate you gave me?

Tman - You are absolutely correct. The sales volume is DOWN from its peak.

Sandra, if So Cal is the best place in the world to live, why are you looking to leave after your son is off to college?

As an owner of 5 houses with debt up to your eyeballs and your source of income tied to promoting real estate, I can understand why you have a vested interest in trying to paint an optimistic viewpoint on so cal real estate.

Unfortunately, the facts get in the way of your propaganda. Orange County real estate prices are in full retreat with absolutely no signs of a bottom.

I predict you'll be bankrupt by the time your son goes off the college.

Sandra,

You're singing to the choir here .l.o.l..

There's a big difference between going up - and staying up ....

>>>> Total sales volume of homes in Orange County, California, for 2007 was off about 28% from the volume of 2006, but it was off 56% from our record year of 2003!

Sandra, I know realtors can be incredible spin doctors, but would you actually try and convince us that prices have increased in Orange County over the past year? This is absurd based upon objective data and observations of those involved in Orange County real estate.

I am not sure where you are getting your data from, but to claim prices have risen over the past year in Orange County is deceptive. The following entities have reviewed data as to price changes year over year for Orange County, I also provide their measuring date: Case-Shiller (LA/OC)-13.70% Dec. ’07; DataQuick -16.30% Feb. 22; First American (LA/OC) -15.43% Dec. ’07; Global/National City-10.97%4q/2007; CAR -11.60% Jan. ’08. This is year over year, prices are even lower from the peak.

There are a number of ways to measure overall price changes. No measure is perfect and each has problems. Price per square foot can be very misleading based upon sales mix. For example, a 2,000 sq ft home selling in Santa Ana would have a much lower price per square foot than Newport. Simply stated, change the sales mix and misleading data comes out.

Case-Shiller likely provides the best measure. They are housing trackers from New England who created a paired-sales index, the info above is for L.A. and O.C., using publicly recorded sales data for existing single-family homes. It doesn't reflect everything, for example an increase could be a result of a new kitchen, but does address issues created by changes in sales mix.

I certainly hope you are providing your clients better service than advising them that prices have increased over the past year in Orange County.

NewportFiji

Hi Jim, It's been a while... ;)

People buy because they want to own. Period. People pay 2-3 times more to own than rent here in Southern California, especially along the coast, because it's one of the best places in the world to live. Every homeowner had the choice to rent or buy and chose to buy, whether it makes sense to you or not.

I chose to buy so that I would have control over whether I move or not, not my landlord. I wanted something I could hang onto for a long time and possibly rent in 10 or so years when I do move to another area after my son is out of school and off to college.

Newportfiji, you must be talking about Seal Beach & Stanton when you talk about a 10% price drop because from 2006-2007 those were the only two areas in Orange County with a double digit price drop (based on average price per square foot of closed sales.) The other cities range between gaining 7% (Newport Coast) and dropping 9%(Orange). Overall, Orange County posted a 1.5% GAIN in price per square foot based on closed sales.

The only County in all of Southern California to have a double digit loss was San Bernadino County and it dropped 12%. No kidding since that is where most of the foreclosures are occuring (about 60% of the inventory there is a distressed property)

The other counties:

San Diego - down 5%
Riverside - down 6%
Los Angeles - down 2.5%
Orange County - UP 1.5%

Will more foreclosures continue having an effect on pricing, probably, in the areas hardest hit....... (I can't be sure because Jim broke my crystal ball... )

Will those effects be greater on pricing than rising interest rates because of inflation? In some areas, yes, in some areas, no... It's possible that you can wait, buy a home at a lower price and end up with a higher payment than if you bought now because inflation causes interest rates to rise.

Tman - It did happen before, check out the web reference below. It will take you to a 30 year chart & graph that shows was has happened to home prices over the last 30 or so years.

Newportfiji,

I have to admit that here in greater Boston, at least for single family homes, it is not as bad as you describe in southern California. That sounds close to Manhattan where it can cost $4000 to rent something that would sell for $1.5MM. But, I would think that if you bought that $1.1MM home, in the long run the rents would go up enough to pay the mortgage, and the value of the house would also go up. It is not a short term game.

If you assume that there is no return on your investment for renting, and that home values increase by an average of 2.5% in the long run (probably more, even though the next couple of years may be rough), you will be better off buying. Of course that assumes that you have the money to afford the house you want to live in. I understand that you can invest the difference between the rent and mortgage payment, but the truth is that few renters actually do this. And I am just about as confident in the stock market right now as I am in the housing market.

It is very rare for homes to be sold on a cash flow positive basis, meaning you could purchase the house today and rent it tomorrow for the amount of the mortgage plus taxes, insurance and costs. When that is the case, it is a great idea to jump on board, assuming you know what you are doing.

Bayou, interesting theortical numbers, but you clearly haven't visited coastal southern California lately. Here are a couple of real recent examples in my area, Home No. 1: Listed at $1,499,00 for sale, $3,600 month to rent; Home No. 2: Listed $1,300,000 for sale, $3,500 month to rent; Home No. 3 listed at $1,100,000 for sale, $2,850 month to rent. Now explain to me how buying makes sense with these numbers. You may also want to consider that in California the average person moves every seven years or so, an approximate1.25% property tax rate, the lack of interest deductability after $1,000,000 and property values have dropped about 10% over the past year.

Also, it has not always been cheaper to rent versus own short term. In the mid 90's in coastal southern California, it was cheaper to own than to rent. In fact, you were probably still ahead owning versus renting through 2001. As the real estate bubble deflates, I believe that it will make more economic sense to own versus rent. But, in my opinion it does not right now.

NewportFiji

It will always be cheaper in the short term to rent something rather than own it. That is what makes renting attractive. But, in the long run, you will receive benefits by owning a property that you will not get by renting. For example, say you rent a single family house in the Boston area for $2,000 a month. That same house would cost about $500,000 to purchase. With insurance and taxes, and assuming a 5% down payment and a 6% interest rate, that house is going to cost about $3,300 a month to own. Toss in repairs and lets say $3,500 a month for simplicity. With very modest rent increases (3%), the renter would pay about $650k to live in that house for 20 years. The owner would have paid about $750k, so about $100k more over 20 years.

The owner would have also received a tax refund of about $8k a year for the first year, and slightly less each year. Also, at this point, it is likely that the market rent for the property now exceeds the mortgage payment, so the owner can rent the house out and let the renter pay the mortgage for the next 10 years. It is also likely that over these 20 years the house has increased in value to about $800,000 (assuming only 2.5% increase per year, which is not extreme). The owner now has a nice nest egg.

I rented for many years, and am not advising against it. But, I do recommend considering the benefits of owning, and taking advantage of the down market to make your purchase.

NewportFiji,

Keep in mind .. all this talk about alternatives, foreclosures, defaults really falls into the geographics of the issue ... not everyone lives on the left coast, nor do most folks that live in the country (thank goodness)

So for the ones that jumped into the market, fell in, lied their way in or even got pushed in and did little or no homework, the blame falls on them ... for the others that were patient, calm and studied the market, they will do well - and most have ...

Paying $780,000 for a home that sold for $359,900 4 years ago was like putting fires out with gasoline .... it never happened before, why would people ever think it would happen now...?


;^)

There is little question that historically it make sense to purchase a home at some time. But, the referenced study has little applicability to the present discussion. The question is not whether it made sense to purchase in 1975, 1985 or 1995, the question is whether someone should purchase today. The alternative is not to always forego purchasing, but whether it makes sense to wait a few years and purchase when prices decrease as the housing bubble deflates.

Your implication that housing can create wealth is misguided under current market conditions. Ask someone who purchased in 2006 or 2007 in most parts of California how much wealth they created with such purchases. The answer is obvious from the record level of foreclosures and defaults the state is experiencing. Those purchasers would have been better served by renting and ignoring the hype created by realtors who claimed real estate is always a great “investment” and prices would only continue to rise.

Even with the tax “benefits” of ownership, in very few instances does purchasing make economic sense over renting right now. With that said, the economics for purchasing over renting are coming closer and as prices fall further during this collapsing bubble it may make economic sense to buy at some time in the future.

Of course, a home purchase is more than an investment and is not always based upon economics. I purchased a home in Southern California in December 07. My wife and I loved the home and area we needed a larger home for our growing family. It was a bank owned REO that I was able to negotiate about 30% off the 2006 purchase price which had been well over $1,000,000. My wife and I purchased assuming that the value will drop even further. But, we have been blessed the past few years and the market value is of secondary concern.

Our situation was somewhat unique, and in my opinion in rare circumstances does it make sense to purchase a home right now. Most people would be greatly benefited by simply wait a while longer for prices to decrease further.

NewportFiji

I am not sure why you feel it costs 2 to 3 times as much to rent rather than own, however there are costs to owning that you do not have when you rent. Those costs include property taxes, insurance, loan payments, and maintenance on your home. On-the-other-hand, keep in mind, that when someone rents they are paying those costs for the landlord (i.e. included in the rent). Landlords are not an altruistic bunch. They are not going to subsidize a tenant.

Much of what you may think of as high costs of owning becomes a benefit in the long run. Owners are able to deduct loan interest, and property taxes to get an income tax benefit. There are very few comparable tax breaks for renters, and the few that exist are mostly restricted to low-income families. In addition, the median net worth of a lower-income homeowner is more than 13 times that of a renter with comparable income, according to Harvard University’s Joint Center for Housing Studies. Ownership is forced saving. Typically, payments in the first few years of a mortgage are applied to interest. As time passes, however, more and more of each payment is applied to the outstanding loan amount, accumulating equity that can be recaptured, if needed, through an equity line of credit or when the house sells.

For example, some who pays $2,300 per month in rent for 30 years will have paid over $828,000 to the landlord, without considering any rent increases during that time. Furthermore, that renter will have no income tax breaks, and nothing to show for all that money paid over all those years. A homeowner, on-the-other-hand will have had income tax benefits each year during that 30 years, and equity, not only from increased value, but also from the loan being paid down or paid off. Finally, the first $250,000 to $500,000 in capital gains from the sale of an owner-occupied home is excluded from taxation.

If you have specific example, you are using, I would be happy to discuss it with you.

Barry Bussiere
Pacific Strand Real Estate
714-536-7434

Actually, only recently when the bubble burst did the cost of "owning" exceed renting significantly. Remember that 3 years ago, banks were GIVING AWAY loans to people with zero % down and then when those people ran out of money, they refinanced and got an extra $100,000 in equity simply because the prices had gone up in 6 months. Now that the party is over and reality has set in, the grim truth is that because of the run-up, the true cost to own without the artificial re-finance-my-home-is-an-ATM mentality has now far surpassed the cost to rent by epic proportions.

So yep, 3 years ago it "appeared" that the cost to own was the same as renting and when they pulled the plug on those crazy lending practices well, without the constantly rising equity, we're left with insane monthly payments for a shack.

Exactly, we are in a deflating real estate bubble. We will reach a historical rent/purchase equilibrium as prices drop further.