I had a lease-option on a 2 bed/2 bath condo in Reston, Virginia (Shadowood) for $245,000. This was in the summer of 2006. The 2/2s had sold for as much as $275,000. The 3/2s had sold for up to $300,000. Today, the 3/2s range from $125,000 to about $160,000. There are some 2/2s on the market at $145,000, but why would anyone buy a 2/2 when you can get a 3/2 for the same or less?
My strategy was to do a sandwich lease-option, marking the price and the rent up a bit and finding a tenant-buyer. In retrospect, of course, the tenant-buyer (had I found one) wouldn't have bought, but all they'd have lost is a few hundred dollars a month that would have been credited to their purchase price. Instead, some of those units still sold...for $230,000, then $210,000...then $190,000...and so on. And lots of the people who bought at those prices are not in foreclosure.
That whole experience cost be about $5,000 (in lease costs and marketing expenses), and four months of my time. And while my strategy was never to buy the place, but rather do a sandwich lease-option, had I bought, I'd be out well over $100,000. (That, in fact, was one reason I was doing a lease-option: to protect myself if prices did fall.)
More generally--and feel free to check my other posts--I agree fully that "sometimes, in some markets, and in some asset classes, there are distinct and measurable times when it's a bad idea to buy." And I also agree with Brent regarding your contributions to Trulia.
To answer your question, â€œ[H]ow is a buyer going to calculate what they have saved by not buying?â€
As a mortgage broker, Iâ€™m sure that you know that it just works out to a net present value problem, right?
Or, put even more simply: just look at the kind of house you would have bought at the peak in 2005.
Now, look at what itâ€™s selling for today.
Thereâ€™s your cost for buying in 2005, my friend. Add to it what you could have made employing your capital (assuming people in 2005 made down payments â€“ a stretch, I know) in other, higher returning ventures.
I will concede that if the price to purchase a given unit is less than the price to rent it â€“ then itâ€™s a great time to buy. Unfortunately, thatâ€™s not the case in the vast majority of America today. Prices are not being supported by rents or any semblance of income growth fundamentals.
In most of America, itâ€™s MUCH more expensive to buy a given housing unit than rent it. Reference the CEPR report below that concluding just that.
Now I'm a banker not a mortgage broker! lol there is definately a huge difference. I was a mortgage broker for 3 years but did not like the objective at the end of the day, needless to say. I have to say, I agree with your comment totally and 100%. If it's not a smart calculated buy, it makes no sense. Unfortunately, the vast majority of homebuyer's don't share your weath of knowledge. They want to own a house! Maybe a stupid decision but their choice. You are absolutely right they shouldnt be pursuaded into a purchase feeling like it is the right thing to do when it could possibly hurt them in the long run! I do want to say, as much as you raise turmoil with some of the realtors on here, I agree with most of your comments on here and they are well thought through!!! I think you are a great voice on trulia and people need to embrace your knowledge instead of bashing you because it digs into their pocket books and idealogy. You back your comments up with facts and references. plain and simple, in my books anyone who feels like refuting them would look like an idiot not to do the same!
Brent - agreed - a very big difference. My apologies. Thanks for your compliment and your answer, BTW.
Don - thanks for your answer as well. That's a great data point. Thank goodness it turned out to be a $5000 loss instead of a $130,000 one! Thanks for the kind words â€“ I always look for your posts - youâ€™re quite the straight-shooter here and a lot of people really appreciate it.