Do I have to buy a house?

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Super Hans
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Do I have to buy a house?

Post by Super Hans » Sun Jul 22, 2012 7:41 am

Here's a twist on a familiar board topic: I'm furious with the lease renewal proposal my landlord slipped under my door yesterday, but I really don't feel like buying a place to live. Is buying the only responsible strategy considering I have the money to buy? Am I being irrational and throwing away a big chunk of my income? Or am I justified in betting that the transaction and holding costs of buying are too high given my likely life changes ahead?

I'm 32 and live in downtown DC. The monthly rent for my 1-bedroom is going up just over 10% to nearly $2700. I've found the rent to be outrageous for a while, even as a working professional whose neighbors are mostly students. A comparable condo would cost about $450k, but I expect to outgrow the small size soon. A large 2-bedroom that I expect I could enjoy for the long run would probably cost $700-800k. I have about $600k in cash. In other words, I could write a check for the 1-bedroom, but I'd need a mortgage for the 2-bedroom. I don't see a reason to get a mortgage beyond what I need to avoid a liquidity crunch. I never figured out the value of a mortgage as a tax strategy: isn't the perk of getting to deduct the interest the same as deducting my charitable contributions? I guess if I were heavily leveraged, it would be a hedge against dramatic market downturns. The condo fees can be a killer. They would range from about $400/month for the 1-bedroom to $850/month for a large 2-bedroom in a building with needless cost centers like a pool. And then there's property tax, to help round-out the feeling I'm still paying rent, even when I own.

I shunned the advice from many around me to buy the most expensive property possible at the height of the bubble. That said, I'm not crazy about timing the market. Buying a condo with a huge chunk of my savings doesn't seem too much wiser than simply gambling 75-100% of my savings that a Spanish bank stock is oversold. DC didn't take the hit that many markets did. There are cranes all over, and I feel like the increased supply of condos downtown may put downward pressure on prices. If there are real cuts to the federal government, and especially federal contractors, it could be a shock to demand. As I tread water, I'm having to pay rent while my "high-yield" savings account APYs top out at 1.35%. I don't have any kids yet. I think a 2-bedroom would be ample for a kid -- or maybe even 2 for a bit -- though please tell me if I'm delusional. The answer may be that I have to move to the 'burbs and start up with a commute that will slowly kill me. It looks like the big house in Bethesda would set me back about $1 million. My 10-minute walk to work is a luxury I don't take for granted.

My background is that I made a nice salary for a number of years in my 20s at a high-flying law firm, but then I left for government service. I make in the $140s now, and if I stay in the federal system my career maximum will be $155k or $179k, depending on whether I end up in a "senior executive" position (the extra stress of the latter doesn't seem worth the extra $25k, but it varies widely on the specific position). I paid off my student loans early on, and I've maxed out my 401(k) and Roth/backdoor Roth IRA every year for a decade (nearly all of which is invested in ultra-low expense index funds), plus an HSA and a 529 for non-existent offspring for the last few years.

Another bit of material information is that I live with a fellow Fed with an identical salary and a similar savings history, though she's only managed after-tax cash savings in the $300s. When I think of it as paying $1350 in rent, I sleep better. But I like to look at things without factoring in her finances much. The specter of children requires that we plan for a lot of "leave without pay" time coupled with bigger expenses.

Thanks for reading my rant. I've appreciated all the wisdom on this board and hope you'll share some observations that help me think through my next steps!

Userdc
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Re: Do I have to buy a house?

Post by Userdc » Sun Jul 22, 2012 7:51 am

Keep renting.

The paper slipped under your door with the higher rent is pretty much the only downside to renting, so don't go buy a condo because its fresh in your mind.

If your willing to move, negotiate with your landlord. Otherwise, swallow the higher rent and sleep soundly.

johnny72
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Re: Do I have to buy a house?

Post by johnny72 » Sun Jul 22, 2012 7:56 am

.....
Last edited by johnny72 on Fri Aug 03, 2012 6:23 am, edited 1 time in total.

bberris
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Re: Do I have to buy a house?

Post by bberris » Sun Jul 22, 2012 8:33 am

Super Hans wrote: Am I being irrational and throwing away a big chunk of my income?
Can we stop saying that one throws away money on rent? You are paying for a roof over your head and a few walls. When I go to the market I don't say I'm throwing money away on food.
Do the people who bought houses at twice their current price say that they threw money away?

Muchtolearn
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Re: Do I have to buy a house?

Post by Muchtolearn » Sun Jul 22, 2012 8:38 am

OP, common dilemma. Yes, they increased your rent 10%. Real estate taxes and government fees of various kinds can go up significantly as well. Right now it is a landlord's market. It wasn't a few years ago. Things change. You are not throwing out your money. When the tax laws revert in January, the real estate deductions and mortgage interest deduction get phased out for "rich" people like you, actually anybody above about 150K or so.
Last edited by Muchtolearn on Sun Jul 22, 2012 8:42 am, edited 1 time in total.

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TomatoTomahto
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Re: Do I have to buy a house?

Post by TomatoTomahto » Sun Jul 22, 2012 8:39 am

johnny72 wrote:
I own my house but that's because I have young kids and want to give them a sense of permanence.
I'll join the chorus for not buying. If you can't renegotiate the rent and refuse to pay the increase, move. We have kids and wanted to be able to renovate, but once the kids are in college, house goes on the market (a bit over 4 years from now). After that, plumbing, roof, etc are someone else's problem, and I'll gladly pay an uptick for that freedom.

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TomatoTomahto
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Re: Do I have to buy a house?

Post by TomatoTomahto » Sun Jul 22, 2012 8:41 am

PS. Even the way you phrase the question gives you the answer (do I Have to ... (underlining added))

sscritic
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Re: Do I have to buy a house?

Post by sscritic » Sun Jul 22, 2012 8:47 am

Claude wrote:PS. Even the way you phrase the question gives you the answer (do I Have to ... (underlining added))
He could try "must." It gives it that old fashioned classy sound: "Must I buy a house?"

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TomatoTomahto
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Re: Do I have to buy a house?

Post by TomatoTomahto » Sun Jul 22, 2012 10:14 am

sscritic wrote:
Claude wrote:PS. Even the way you phrase the question gives you the answer (do I Have to ... (underlining added))
He could try "must." It gives it that old fashioned classy sound: "Must I buy a house?"
I prefer "have." it reminds me of a kid's response to a parent when told to eat their veggies, go to bed, etc. "Do I HAVE to?????" "Must" sounds classy, as you say, but also very dramatic.

Super Hans
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Re: Do I have to buy a house?

Post by Super Hans » Sun Jul 22, 2012 10:34 am

sscritic wrote:

Claude wrote:PS. Even the way you phrase the question gives you the answer (do I Have to ... (underlining added))


He could try "must." It gives it that old fashioned classy sound: "Must I buy a house?"
I actually phrased the topic as "Must I..." at first, but I heard myself saying it in my best George Plimpton voice and was afraid of looking pretentious (and I know my place as a non-landowner). Thanks so much for your comments, everyone. We all seem to be on the same page. Even though I used the dreaded "throwing money away" construction, I also find it seriously flawed.

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Watty
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Re: Do I have to buy a house?

Post by Watty » Sun Jul 22, 2012 10:40 am

to nearly $2700.......A comparable condo would cost about $450k
You are comparing a cash purchase to rent which is not a fair comparision.

A $450K mortage would run about $2,150 a month, when you add in condo fees, maintenance, etc the rent vs buy question could go either way from a financal viewpoint depending on the details of the numbers. Without very compelling numbers there is no reason buy when you really do not want to buy.

It would be good to take a look at what other rentals are available, both nearby and at various commute distances. If could be that living in that location to avoid a commute is no longer worth the high price.

One thing that I would take a hard look at though is to see if you could get a transfer to lower cost city. There are lots of nice places where you can get a nice one bedroom condo for in the low $100's (or less) and even if it is not on as high paying career path your disposable income could go way up after paying your rent and other expenses each month. At the rate you are going you might be able to retire or cut back to part time work at a very young age if you are living a low cost area.

Honobob
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Re: Do I have to buy a house?

Post by Honobob » Sun Jul 22, 2012 10:46 am

http://www.neighborhoodscout.com/dc/was ... iew/#rates

22 years of almost 9% average annual appreciation. Rent increase of 10% over one year. Historic low mortgage interest rates. Nope, you don't have to do anything but pay the rent. I think you'll figure this out.
It's slowly dawned on me that we won the real estate lottery!

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SnapShots
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Re: Do I have to buy a house?

Post by SnapShots » Sun Jul 22, 2012 11:08 am

Me, too. Don't Buy. I'm a landlord. It is cheaper to keep a tenant than replace one. If it's a tight rental market you might not have any bargaining power. But, ask the landlord for a lower rate increase because - you pay on time - you take care of the property - want to be there a long time - blah, blah, blah. Understanding things go up you're willing to pay 5%. Or, just forget it and stay knowing you can up and leave at the end of the lease.

BTW - housing is not horrible everywhere. It depends on where one lives.
the best decision many times is the hardest to do

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bengal22
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Re: Do I have to buy a house?

Post by bengal22 » Sun Jul 22, 2012 11:39 am

I do not live in DC but I do think that it is a great time to buy - low interest rates, depressed market. I agree with the poster that cited historical home appreciation and think that people are too hung up on the most recent past. In my lifetime, home ownership has been a good thing and has helped me accumulate wealth and to have a nice place to experience life.
"Earn All You Can; Give All You Can; Save All You Can." .... John Wesley

edge
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Re: Do I have to buy a house?

Post by edge » Sun Jul 22, 2012 12:58 pm

A 300k$ condo in a 'nice area' in the burbs would probably give him an hour commute.

jenny345 wrote:You can use this graph from Zillow to see where the negative equity areas are in your geographic area.
http://www.zillow.com/visuals/

You can also check Zillow to check for the foreclosure backlog. Personally I cannot see how homes can go up or even keep up with inflation in price long term in areas where there are high numbers of distressed properties. I think it is a kind of scary time to buy a house right now. Maybe banks and the government will find a way to keep home prices from dropping even further long term but that would be a neat trick. Can they keep interest rates low and foreclosures off the market for another decade to prop up housing prices?

Renting might be a better choice than paying 600K cash for a condo and and then losing half your money in yet another housing downturn. Can you buy a newish 300K condo or house somewhere in the burbs near mass transit and still have a reasonable commute? Then if prices dropped further you are not out so much money and the mortgage would be much cheaper than the rent you are paying now. The New York Times has a calculator to help you decide if renting or buying is cheaper -
http://www.nytimes.com/interactive/busi ... lator.html

Here is an article by Thomas Stanley on why a cheaper house may be better for your long term wealth -
Avoiding the Money Pit
http://www.thomasjstanley.com/blog-arti ... y_Pit.html

johnny72
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Re: Do I have to buy a house?

Post by johnny72 » Sun Jul 22, 2012 1:25 pm

bengal22 wrote:I do not live in DC but I do think that it is a great time to buy - low interest rates, depressed market. I agree with the poster that cited historical home appreciation and think that people are too hung up on the most recent past. In my lifetime, home ownership has been a good thing and has helped me accumulate wealth and to have a nice place to experience life.
Repeat after me. Low interest rates are a horrible reason to buy a house.

Why doesn't everyone know this? It's simple affordability. There are always X people that can afford a house of Y price. The problem comes in that for most people price is actually a surrogate for monthly payment. As interest rates rise, demand drops all the way up and down the price curve. Other forces exacerbate this (ex: perception of having missed the boat on low interest rates, further eroding commonly held misbelief that owning is always profitable in the long run, etc).

Don't listen to the Realtors on the board. Low interest rates are the worst reason to buy a house. Either interest rates stay the same and you've gained no benefit by buying or interest rates rise and you get a huge capital loss as the affordability and therefore value of your home plummets. The best thing that could happen is that interest rates continue to fall as they have been but that stops at some point.

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LH
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Re: Do I have to buy a house?

Post by LH » Sun Jul 22, 2012 1:56 pm

600k in cash? Why so large?

I guess moving out of the downtown area is not in cards?

Areas like new york, dc, seem complex to me.

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DiscoBunny1979
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Re: Do I have to buy a house?

Post by DiscoBunny1979 » Sun Jul 22, 2012 2:10 pm

I agree wth Johnny72, Interest Rates are no reason to buy a house. Sure they are low right now, but the real reason to buy a house or condo is because you want to (not have to) OR you have a particular reason. What is the reason the OP wants to buy a house? "Thinking about kids" is not the same as actually having them or actually planning to have them. Living with someone . . . is not the same as saying that person will be your life partner or spouse. What's the real deal? Once there is a committment to things, then the house or condo buying question can be answered. But for now, I'd say don't buy anything. Cash is King.

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bengal22
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Re: Do I have to buy a house?

Post by bengal22 » Sun Jul 22, 2012 3:01 pm

never mind
Last edited by bengal22 on Tue Jul 24, 2012 8:03 pm, edited 1 time in total.
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Mudpuppy
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Re: Do I have to buy a house?

Post by Mudpuppy » Sun Jul 22, 2012 3:07 pm

I just have a slightly different take on this. Why did the letter slipped under your door irritate you so much? Was it just the size of the rental increase or are there other factors about the rental that have been chewing on the back of your mind? Were there other actions by the landlord that you dislike, such as slow response to repair requests or sloppy handling of rental payments or the like?

It might just be that this rental increase was the proverbial straw that made you realize your level of dissatisfaction with that particular rental. That doesn't mean you have to go out and be a condo owner. It might just mean you need to look for a different rental. Or you can do both, keeping an open mind to what possibilities might spring up. You never know when you might stumble across the "perfect" rental or condo.

But if you are truly dissatisfied with the current rental unit, then you should at least take a little time on the weekends/evenings to peruse online rental and real estate listings and see what's out there. If you work close to a Metro station, you can even venture a little farther out by looking at other places within a reasonable distance of a Metro station, which could be far faster than commuting by car. There's no commitment to moving to a new rental or buying a place by looking, but it at least gets you informed. And information is key in making a decision.

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Ketawa
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Re: Do I have to buy a house?

Post by Ketawa » Sun Jul 22, 2012 3:27 pm

johnny72 wrote:
bengal22 wrote:I do not live in DC but I do think that it is a great time to buy - low interest rates, depressed market. I agree with the poster that cited historical home appreciation and think that people are too hung up on the most recent past. In my lifetime, home ownership has been a good thing and has helped me accumulate wealth and to have a nice place to experience life.
Repeat after me. Low interest rates are a horrible reason to buy a house.

Why doesn't everyone know this? It's simple affordability. There are always X people that can afford a house of Y price. The problem comes in that for most people price is actually a surrogate for monthly payment. As interest rates rise, demand drops all the way up and down the price curve. Other forces exacerbate this (ex: perception of having missed the boat on low interest rates, further eroding commonly held misbelief that owning is always profitable in the long run, etc).

Don't listen to the Realtors on the board. Low interest rates are the worst reason to buy a house. Either interest rates stay the same and you've gained no benefit by buying or interest rates rise and you get a huge capital loss as the affordability and therefore value of your home plummets. The best thing that could happen is that interest rates continue to fall as they have been but that stops at some point.
A Google search finds that this is not necessarily true. Historically, interest rates have little correlation to home prices. Just look at this graph of the Treasury yield vs the real Case-Shiller index. I don't see any substantial relationship.

Image

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GregLee
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Re: Do I have to buy a house?

Post by GregLee » Sun Jul 22, 2012 3:53 pm

Use your 600k to buy in the suburbs and just grit your teeth about the commute -- it won't kill you. And each month, you can congratulate yourself on saving that $2700 you would have had to pay in rent, the next year, then $2781/month, the next year, and up and up each year, because that's what rent does -- goes up and up and up.
Greg, retired 8/10.

stan1
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Re: Do I have to buy a house?

Post by stan1 » Sun Jul 22, 2012 4:18 pm

Take a drive next weekend through North Arlington (east and west of Military Rd, South of Chain Bridge, North of Lee Hwy).
See if those are neighborhoods you could see your self living in with a family, or as a couple within the next 5 years.
There are smaller pockets of other neighborhoods like that in other parts of Arlington, Alexandria, Bethesda, and a few other places.
That's what I'd be doing if I was in your situation (if you are in a long term relationship with 2 incomes).

You'll see many houses in that area that are much more expensive, but mixed in there are plenty of houses in the $700-850K price range (and that don't have a 2000 square foot addition).

There are tens of thousands of couples in the DC area in your same income situation. Location in attractive neighborhoods that are close in is VERY competitive.
In DC I would definitely pay $200-300K more for a 30 minute commute each way instead of a 90 minute commute each way.

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VictoriaF
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Re: Do I have to buy a house?

Post by VictoriaF » Sun Jul 22, 2012 4:43 pm

The looming sequestration or similar budget cuts may in fact have a significant impact on the D.C. employment and real estate values. This can go only one way, i.e., towards reducing employment and salaries, and the question is only how far it will go. Thus, you should wait at least until early next year before buying. And therefore, you should sign the lease for another year, however unpleasant it currently feels. It would be far more unpleasant to buy a condo or a house and see it dropping in value, going down with the market.

As others have pointed out, as a cash purchaser you want to see high interest rates that would depress the prices.

Your ability to walk to work is highly valuable. If you, for example, moved to Arlington and had to commute by Metro, you would be spending money and time on the Metro, and a comparable apartment would not be much cheaper. (On the other hand, your Virginia taxes would be lower.)

I'd suggest that for as long as you do not have children, live where you do, enjoy city living, and save what you can. Once you make children the immediate priority, you would be better off buying a house or townhouse in Arlington or Bethesda rather than a condominium in DC. But that would be motivated by your lifestyle choices, not by the rental increase.

Good luck,

Victoria

P.S. Make sure that you put the maximum into TSP. The G fund is a good place to hold fixed income while everyone is waiting for the bond prices to collapse under the pressure of (eventually) rising rates. You can roll your former 401(k) into TSP, if you wish, but that's a different topic.
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staythecourse
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Re: Do I have to buy a house?

Post by staythecourse » Sun Jul 22, 2012 6:31 pm

No you are not crazy. Don't get caught up in the biggest scam in this country of "everyone should own their own home". The only people that benefit from that thought process is not the home owners, but everyone who make money of them in the process of buying and mantaining their homes.

I own a home and would not change is for anything, but I am married, expecting our first, and well settled at work.

I don't understand why any young, single person would want to tie themselves down (and tie up money) in owing a home.

My advice would be keep renting and spend some of that cash on investing (everyone needs to retire not everyone needs to buy a home).

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Do I have to buy a house?

Post by porcupine » Sun Jul 22, 2012 6:37 pm

GregLee wrote:Use your 600k to buy in the suburbs and just grit your teeth about the commute -- it won't kill you.[...]
His commute might not kill him ... but his SO might :wink:

- Porcupine

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SpecialK22
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Re: Do I have to buy a house?

Post by SpecialK22 » Sun Jul 22, 2012 8:22 pm

The clichéd response is that if you plan to live in the property for a lengthy amount of time then buying would make sense. Since it sounds like you are likely to be in the area for awhile and could see yourself living in a larger condo for a good amount of time, this to me would make buying more attractive. Of course even condos have their own headaches (I own one) and it isn't an either-or situation between continuing to rent the same place or buying in the same area. Others pointed out some other good alternatives that you might consider.

Does your landlord have any other fun stipulations such as paying up to six months worth of rent if you break the lease prematurely? Does the 10% increase reflect him giving you a deal (i.e. he could get a new tenant and charge 15%-20% more than your current rent) or do you think he is trying to screw you over? I'm also pretty sure DC doesn't have rent control, which to me would be a huge negative against long-term renting.

I certainly would not go into homeownership merely because I was frustrated with renting, unless the situation was really bad. Yours doesn't seem to be horrible. The skyrocketing rent increases certainly suck, but it seems the last few years have been pretty bad for DC area renters in that regard. 10% is a bit on the higher side though. Are you new to the area by chance? (I don't mean that as an insult).

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Re: Do I have to buy a house?

Post by johnny72 » Sun Jul 22, 2012 9:30 pm

Ketawa wrote:
johnny72 wrote:
bengal22 wrote:I do not live in DC but I do think that it is a great time to buy - low interest rates, depressed market. I agree with the poster that cited historical home appreciation and think that people are too hung up on the most recent past. In my lifetime, home ownership has been a good thing and has helped me accumulate wealth and to have a nice place to experience life.
Repeat after me. Low interest rates are a horrible reason to buy a house.

Why doesn't everyone know this? It's simple affordability. There are always X people that can afford a house of Y price. The problem comes in that for most people price is actually a surrogate for monthly payment. As interest rates rise, demand drops all the way up and down the price curve. Other forces exacerbate this (ex: perception of having missed the boat on low interest rates, further eroding commonly held misbelief that owning is always profitable in the long run, etc).

Don't listen to the Realtors on the board. Low interest rates are the worst reason to buy a house. Either interest rates stay the same and you've gained no benefit by buying or interest rates rise and you get a huge capital loss as the affordability and therefore value of your home plummets. The best thing that could happen is that interest rates continue to fall as they have been but that stops at some point.
A Google search finds that this is not necessarily true. Historically, interest rates have little correlation to home prices. Just look at this graph of the Treasury yield vs the real Case-Shiller index. I don't see any substantial relationship.

Image
I see an obvious relationship between interest rates being held artificially low after 1999 and the ridiculous run up in prices we experienced. It's in the very chart you posted.

Even further, most of the data in the chart you posted is not relevant. It occurred while we were on the gold standard and the federal reserve was not as able to make money appear out of thin air and therefore manipulate interest rates to the extent they can today.

johnny72
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Re: Do I have to buy a house?

Post by johnny72 » Sun Jul 22, 2012 9:32 pm

bengal22 wrote:
johnny72 wrote:
bengal22 wrote:I do not live in DC but I do think that it is a great time to buy - low interest rates, depressed market. I agree with the poster that cited historical home appreciation and think that people are too hung up on the most recent past. In my lifetime, home ownership has been a good thing and has helped me accumulate wealth and to have a nice place to experience life.
Repeat after me. Low interest rates are a horrible reason to buy a house.

Why doesn't everyone know this? It's simple affordability. There are always X people that can afford a house of Y price. The problem comes in that for most people price is actually a surrogate for monthly payment. As interest rates rise, demand drops all the way up and down the price curve. Other forces exacerbate this (ex: perception of having missed the boat on low interest rates, further eroding commonly held misbelief that owning is always profitable in the long run, etc).

Don't listen to the Realtors on the board. Low interest rates are the worst reason to buy a house. Either interest rates stay the same and you've gained no benefit by buying or interest rates rise and you get a huge capital loss as the affordability and therefore value of your home plummets. The best thing that could happen is that interest rates continue to fall as they have been but that stops at some point.
I am not a realtor and resent that comment. Interest rate do make a house more affordable and there is no data to show that house values will go down when interest rates go down. I was speaking from my experience and I guess simple minds argue with slams rather than information. I was surprised you could spell "exacerbate."
OK so I've indirectly called you a Realtor and you've directly called me an idiot. Let's call it even and move on.

johnny72
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Re: Do I have to buy a house?

Post by johnny72 » Sun Jul 22, 2012 9:35 pm

jenny345 wrote:Washington D.C. seems to have one of the longer commute times in the nation (33.9 minutes), so it often comes down to a choice between more affordable housing or longer commute.
http://www.marketwatch.com/story/top-10 ... 2011-09-22

I think low interest rates are a valid consideration for buying a home right now, even if you can pay cash. You can always pay off a fixed rate loan if rates do not go up, but if they do go up in say 5 years from now you can make a tidy profit on the spread for maybe 25 years. (300K loan X 3 percent rate differential = 9K per year gross profit)
And how much have you lost on the spread while you wait for interest rates to rise? If we follow Japan it will be decades before we get higher interest rates.

Your house should not be used as collateral for investing on margin.

johnny72
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Re: Do I have to buy a house?

Post by johnny72 » Mon Jul 23, 2012 7:13 am

jenny345 wrote:
johnny72 wrote:
jenny345 wrote:Washington D.C. seems to have one of the longer commute times in the nation (33.9 minutes), so it often comes down to a choice between more affordable housing or longer commute.
http://www.marketwatch.com/story/top-10 ... 2011-09-22

I think low interest rates are a valid consideration for buying a home right now, even if you can pay cash. You can always pay off a fixed rate loan if rates do not go up, but if they do go up in say 5 years from now you can make a tidy profit on the spread for maybe 25 years. (300K loan X 3 percent rate differential = 9K per year gross profit)
And how much have you lost on the spread while you wait for interest rates to rise? If we follow Japan it will be decades before we get higher interest rates.

Your house should not be used as collateral for investing on margin.
Hmmm, let me see. My 30 years TIPS are averaging a higher return than my 30 year mortgage so I guess I'm not waiting at all. How cool is that?

The Wiki has a bit more in depth analysis of paying down loans versus investing for those that have not read it yet -
http://www.bogleheads.org/wiki/Paying_d ... _investing
If what you say is true then obviously you bought the 30 year TIPs before you got the rate on your mortgage. Congratulations on that but you're not faced with the pay down mortgage vs invest decision because you've already made that decision wih that money for the next < 30 years. The fact is uncommitted money today will have a negative spread if you invest it today in low risk assets vs. paying down your mortgage.

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Re: Do I have to buy a house?

Post by johnny72 » Mon Jul 23, 2012 7:18 am

Just went back and read the Wiki article you linked. I agree with its priority order 100%. Please take notice that it lists paying down a mortgage as a higher priority than taxable investing:
Invest in 401(k) to get maximum employer match (rate may be over 100% in the first year)
Pay down credit cards (rate 10-30+%)
Pay down non-deductible auto or student loans, or other medium-rate loans (rate 5-8%)
Invest in Roth IRA, deductible IRA or decent 401(k) (rate 5% on Treasury bonds)
Pay down deductible mortgage or student loans (rate 4% after tax)
Invest in taxable account (rate 4% on municipal bonds)
Do not pay down subsidized loans as long as subsidy lasts (rate 0-3%)

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Re: Do I have to buy a house?

Post by NoVa Lurker » Mon Jul 23, 2012 8:53 am

OP - I was in your shoes not too long ago. Saved like crazy while working long hours at a big law firm, then switched to an international organization, where salary is lower but life is much better.

First, great job on saving so much, and don't knock your SO's cash savings, either! "Only" in the $300s, not counting retirement money? When we got married, my wife's total non-retirement savings was slightly negative (thanks to still-remaining student loans) and mine was around $500k, so your situation is a little more financially balanced!

Second, I don't know the particulars of your apartment, but your rent doesn't sound bad. $1350 for each of you? Lots of my friends and colleagues in DC have experienced rent increases this year, and many of them are paying over $3000, without roommates, in areas where they still have to take the bus to get to work (Adams Morgan, north of Dupont, Georgetown, etc.) instead of walking most of the year.

Third, as most others have said, don't be in a rush to buy, unless you really want to -- even once kids are on the way. We rented until we got married and (she got) pregnant, and then we bought a house and moved from DC to Falls Church. We love our house, and there are lots of good things about living in Northern Virginia, but if anything, I would have waited even longer to leave DC. In retrospect, we definitely could have been fine with one kid in a two-bedroom. Our big house is nice when we have guests, but it mostly goes unused right now.

Financially, our five-bedroom house in Falls Church is actually cheaper than a nice two-bedroom in a decent part of DC. The interest component of our mortgage is less than $1100 (there's also property taxes, insurance, maintenance costs, and extra utility costs that are higher than for an apartment - but that still leaves the total cost around $2000/month, not counting mortgage principal - which I consider to just be forced, illiquid savings). And the commute isn't bad -- it takes me a little over 30 minutes by walk+metro (walk 15 minutes to the metro, then 17 minutes on the metro to DC) or by bike (the trails are great) to get to work. However, I don't think you guys are at the point in your lives where moving to the suburbs makes sense, and buying a condo in DC doesn't make sense long-term, versus just holding onto the cash savings, which gives you all kinds of options.

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Re: Do I have to buy a house?

Post by Ketawa » Mon Jul 23, 2012 9:15 am

johnny72 wrote:I see an obvious relationship between interest rates being held artificially low after 1999 and the ridiculous run up in prices we experienced. It's in the very chart you posted.

Even further, most of the data in the chart you posted is not relevant. It occurred while we were on the gold standard and the federal reserve was not as able to make money appear out of thin air and therefore manipulate interest rates to the extent they can today.
If you want to draw conclusions for time periods we were off the gold standard, why would you look at 2000-2007 instead of 1971-present? In addition, interest rates are lower than ever today but home prices declined from their peaks. A broader reading of the chart might conclude:

post WWII to 1971 - Home prices were mostly flat, interest rates went through the roof. This is on Bretton Woods.
post WWII to 1980 - Home prices were mostly flat, while interest rates went even higher. This extends the prior period to beyond Bretton Woods.
1980 to present - Home prices have experienced more swings, but ultimately they're at the same point as 1980. Interest rates have declined dramatically. This is without a gold standard.

Ultimately, it seems difficult to find a causal relationship between interest rates and home prices.
Last edited by Ketawa on Mon Jul 23, 2012 9:48 am, edited 2 times in total.

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Re: Do I have to buy a house?

Post by johnny72 » Mon Jul 23, 2012 11:07 am

Ketawa wrote:
johnny72 wrote:I see an obvious relationship between interest rates being held artificially low after 1999 and the ridiculous run up in prices we experienced. It's in the very chart you posted.

Even further, most of the data in the chart you posted is not relevant. It occurred while we were on the gold standard and the federal reserve was not as able to make money appear out of thin air and therefore manipulate interest rates to the extent they can today.
If you want to draw conclusions for time periods we were off the gold standard, why would you look at 2000-2007 instead of 1971-present? In addition, interest rates are lower than ever today but home prices declined from their peaks. A broader reading of the chart might conclude:

post WWII to 1971 - Home prices were mostly flat, interest rates went through the roof. This is on Bretton Woods.
post WWII to 1980 - Home prices were mostly flat, while interest rates went even higher. This extends the prior period to beyond Bretton Woods.
1980 to present - Home prices have experienced more swings, but ultimately they're at the same point as 1980. Interest rates have declined dramatically. This is without a gold standard.

Ultimately, it seems difficult to find a causal relationship between interest rates and home prices.
I'm sorry; you're right. Artificially low interest rates are not stimulative to house prices and when the Fed is done creating this unprecedented interest rate environment it most assuredly will have no effect on home prices.

Is this really your position? That Greenspan's unprecedented lowering of interest rates followed by Bernanke's unprecedented lowering of interest rates doesn't make the post-1999 period special?

The original chart you posted went back to the 1800s!! I posted one flaw in your reasoning; there are several. If it is not obvious that lower interest rates stimulate housing prices then nothing I write on an Internet forum will help you get it.

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Re: Do I have to buy a house?

Post by johnny72 » Mon Jul 23, 2012 11:13 am

jenny345 wrote:
johnny72 wrote:Just went back and read the Wiki article you linked. I agree with its priority order 100%. Please take notice that it lists paying down a mortgage as a higher priority than taxable investing
Okay, so my bond funds have returned more than my mortgage rates over this past year, too. You left out the part about taking your personal rates into consideration in the part you copied form the wiki. Getting a low mortgage rate now may be less riskier than many other investment choices - inflation can outpace your bonds, stocks can go down 50% in a year, you may not get your principal back on your bond fund, etc. The key is taking calculated risks where you think the odds are in your favor. If my mortgage was higher than my TIPS purchases when they were made then I took a calculated risk years ago with TIPS rates that I would come out ahead over time. Many people are choosing now to play the odds that investment returns will be higher in the future than their mortgages, with downside minimal risk since their mortgage rates are so low. There isn't one correct answer what to do now unless you know how to predict the future.
You and I have no true disagreement. You made the right decisions in the past that are bringing you a benefit today. Again, congratulations.

The issue at hand though from most people's perspective is what to do with new taxable income. Do you invest that into a negative spread today hoping the spread eventually goes positive? I think that is not the right thing to do. I think that because I don't see interest rates rising anytime soon. I am a professional fixed income trader but as you said I do not have a crystal ball so differing opinions are certainly no less valid.

But I have to say I remember how happy I was when I got a 5.00% mortgage then got an4.125% mortgage then got a 3.00% mortgage and now they're available at no cost for 2.875%. At every turn conventional wisdom was that interest rates were on the cusp of skyrocketing.

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Re: Do I have to buy a house?

Post by GregLee » Mon Jul 23, 2012 1:00 pm

I could have bought a place out of town, with a 30-40 minute commute, when I first started work here in Honolulu, but I thought: commuting? never. So instead I rented for 20 years. It was a mistake, because when I finally came to my senses and bought, I still had to commute, but I had to pay over 3 times as much for an out of town house. And making the down payment took almost all my savings. The 20 years of rent I paid? Down the drain.
Greg, retired 8/10.

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Re: Do I have to buy a house?

Post by TomatoTomahto » Mon Jul 23, 2012 2:39 pm

GregLee wrote:The 20 years of rent I paid? Down the drain.
The 60 years of groceries I paid? Down the drain also; should have bought a farm.
The rent you paid provided you a place to live with the right to easily change your mind and live elsewhere, and without too many worries about taxes, insurance, the roof, plumbing, etc. I own my house, and am happy to own it, but there have been times in my life where renting was appropriate.

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Re: Do I have to buy a house?

Post by GregLee » Mon Jul 23, 2012 3:07 pm

Claude wrote:
GregLee wrote:The 20 years of rent I paid? Down the drain.
The 60 years of groceries I paid? Down the drain also; should have bought a farm.
The rent you paid provided you a place to live with the right to easily change your mind and live elsewhere, and without too many worries about taxes, insurance, the roof, plumbing, etc. I own my house, and am happy to own it, but there have been times in my life where renting was appropriate.
And, you could add, renting let me live less than 10 minutes from work instead of facing over a half hour commute every single work day, Yes, I agree with all this, except perhaps "provided you a place to live" part, since of course I would also have had a place to live if I had bought. A better place to live, actually. But for its effect on how early and how well I could retire, choosing to rent rather than to buy was a terrible decision.
Greg, retired 8/10.

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Re: Do I have to buy a house?

Post by Booper » Mon Jul 23, 2012 3:48 pm

GregLee wrote:I could have bought a place out of town, with a 30-40 minute commute, when I first started work here in Honolulu, but I thought: commuting? never. So instead I rented for 20 years. It was a mistake, because when I finally came to my senses and bought, I still had to commute, but I had to pay over 3 times as much for an out of town house. And making the down payment took almost all my savings. The 20 years of rent I paid? Down the drain.
Thanks for sharing your experience Greg. I think that your experience underscores the risk that we all take in our financial decisions, in this case renting vs. owning. 20 years ago was it reasonable to expect such a sharp inflation-adjusted increase in housing prices in your area? Was it reasonable to assume that in 20 years you would having similar housing needs to those that you had then (size, location, etc)? It's not clear.

Who knows? Maybe in the next 20 years global warming will cause the oceans to rise and the most expensive ocean-front property in Honolulu will go underwater and become worthless.

Just because it wound up being the case doesn't mean that it would have been the right decision at the time.

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Re: Do I have to buy a house?

Post by Ketawa » Mon Jul 23, 2012 4:37 pm

johnny72 wrote:I'm sorry; you're right. Artificially low interest rates are not stimulative to house prices and when the Fed is done creating this unprecedented interest rate environment it most assuredly will have no effect on home prices.

Is this really your position? That Greenspan's unprecedented lowering of interest rates followed by Bernanke's unprecedented lowering of interest rates doesn't make the post-1999 period special?

The original chart you posted went back to the 1800s!! I posted one flaw in your reasoning; there are several. If it is not obvious that lower interest rates stimulate housing prices then nothing I write on an Internet forum will help you get it.
I apologize for further derailing this thread, but here are a couple of scatter plots and regressions I ran using Shiller's own data. If the hypothesis is that rising interest rates cause lower home prices, and falling rates cause higher prices, we should probably be able to see this in the correlations.

First Chart
Image
x-axis: Annual Change in the 10-year Treasury Yield
y-axis: Annual Percentage Change in the Real Home Price Index (1891-2012)

Results from MINITAB

Code: Select all

The regression equation is
Home Index Pct Change = 0.00367 - 0.00189 10-yr IR Change

Predictor             Coef   SE Coef      T      P
Constant          0.003665  0.006650   0.55  0.583
10-yr IR Change  -0.001889  0.008004  -0.24  0.814

S = 0.0734470   R-Sq = 0.0%   R-Sq(adj) = 0.0%
The correlation is virtually zero over the entire series, and we might conclude that changes in interest rates do not cause changes in home prices.

For your hypothesis that we are in a "new normal" post-1999, here is the data.

Second Chart
Image
x-axis: Annual Change in the 10-year Treasury Yield
y-axis: Annual Percentage Change in the Real Home Price Index (2000-2012)

Results from MINITAB

Code: Select all

The regression equation is
Home Index Pct Change = 0.0112 + 0.0354 10-yr IR Change

Predictor           Coef  SE Coef     T      P
Constant         0.01117  0.02691  0.42  0.686
10-yr IR Change  0.03538  0.02660  1.33  0.210

S = 0.0948638   R-Sq = 13.9%   R-Sq(adj) = 6.0%
In this case the correlation is actually positive, i.e. a decrease in interest rates was correlated with an overall decrease in home prices (and vice versa).

Why do we see this data? My guess would be that a statement such as "falling interest rates cause rising home prices" only looks at the demand side of the equation and ignores the supply side. While buyers may increase demand, sellers probably also increase supply by being more willing to sell a home. Conversely, if interest rates rise and demand decreases, supply also decreases since fewer sellers are willing to swap homes and open up a new mortgage at a higher rate. Essentially, the real estate market probably reflects fundamentals of supply and demand for real resources more than it does interest rates.

Hope this helps.

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Re: Do I have to buy a house?

Post by MWCA » Mon Jul 23, 2012 5:16 pm

bberris wrote:
Super Hans wrote: Am I being irrational and throwing away a big chunk of my income?
Can we stop saying that one throws away money on rent? You are paying for a roof over your head and a few walls. When I go to the market I don't say I'm throwing money away on food.
Do the people who bought houses at twice their current price say that they threw money away?
I agree. That was pushed by real estate agents and builders. People bought into it.
We are all worms. But I believe that I am a glow-worm.

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Re: Do I have to buy a house?

Post by johnny72 » Mon Jul 23, 2012 6:15 pm

Ketawa wrote:
johnny72 wrote:I'm sorry; you're right. Artificially low interest rates are not stimulative to house prices and when the Fed is done creating this unprecedented interest rate environment it most assuredly will have no effect on home prices.

Is this really your position? That Greenspan's unprecedented lowering of interest rates followed by Bernanke's unprecedented lowering of interest rates doesn't make the post-1999 period special?

The original chart you posted went back to the 1800s!! I posted one flaw in your reasoning; there are several. If it is not obvious that lower interest rates stimulate housing prices then nothing I write on an Internet forum will help you get it.
I apologize for further derailing this thread, but here are a couple of scatter plots and regressions I ran using Shiller's own data. If the hypothesis is that rising interest rates cause lower home prices, and falling rates cause higher prices, we should probably be able to see this in the correlations.

First Chart
Image
x-axis: Annual Change in the 10-year Treasury Yield
y-axis: Annual Percentage Change in the Real Home Price Index (1891-2012)

Results from MINITAB

Code: Select all

The regression equation is
Home Index Pct Change = 0.00367 - 0.00189 10-yr IR Change

Predictor             Coef   SE Coef      T      P
Constant          0.003665  0.006650   0.55  0.583
10-yr IR Change  -0.001889  0.008004  -0.24  0.814

S = 0.0734470   R-Sq = 0.0%   R-Sq(adj) = 0.0%
The correlation is virtually zero over the entire series, and we might conclude that changes in interest rates do not cause changes in home prices.

For your hypothesis that we are in a "new normal" post-1999, here is the data.

Second Chart
Image
x-axis: Annual Change in the 10-year Treasury Yield
y-axis: Annual Percentage Change in the Real Home Price Index (2000-2012)

Results from MINITAB

Code: Select all

The regression equation is
Home Index Pct Change = 0.0112 + 0.0354 10-yr IR Change

Predictor           Coef  SE Coef     T      P
Constant         0.01117  0.02691  0.42  0.686
10-yr IR Change  0.03538  0.02660  1.33  0.210

S = 0.0948638   R-Sq = 13.9%   R-Sq(adj) = 6.0%
In this case the correlation is actually positive, i.e. a decrease in interest rates was correlated with an overall decrease in home prices (and vice versa).

Why do we see this data? My guess would be that a statement such as "falling interest rates cause rising home prices" only looks at the demand side of the equation and ignores the supply side. While buyers may increase demand, sellers probably also increase supply by being more willing to sell a home. Conversely, if interest rates rise and demand decreases, supply also decreases since fewer sellers are willing to swap homes and open up a new mortgage at a higher rate. Essentially, the real estate market probably reflects fundamentals of supply and demand for real resources more than it does interest rates.

Hope this helps.
With all due respect, you're like a first year statistics major standing on the shore with your eyes closed while a tsunami bears down on you all the while clinging to your historical analysis about the lack of tsunamis on this beach in the past.

The problem is you are looking at a single variable in a complex system and declaring it has no effect.

So I ask you... If not to stimulate housing prices and thereby prop up the economy, why is the fed keeping interest rates so low with open market operations and quantitative easing? Perhaps you think you know better than the fed?

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Re: Do I have to buy a house?

Post by Ketawa » Mon Jul 23, 2012 7:06 pm

What I am declaring is that I do not know what the effect is of interest rates in a complex system like the housing market. My attempts at some very basic statistical analysis were merely to shed some daylight on various claims. Perhaps the Fed wants to keep rates low to increase turnover in the housing market -- if supply and demand both increase, then there will be more existing houses sold. Maybe this will help with the backlog of foreclosed houses. Many distinguished economists disagree over whether the Fed has any actual control over rates other than the federal funds rate.

The important thing is I don't know. The data is not clear, and there is value in admitting what one does not know. I am not the one declaring how a complex system will obviously respond to a change in one variable. I hesitate to even call the 2000s increase in housing prices a bubble, since it is easy to point out bubbles after the fact, but not while they are happening. Maybe people were responding rationally to incentives.

We will have to agree to disagree on this issue.

For those who are interested in further reading, several academic studies are linked at this page.

http://blog.lucidrealty.com/2010/02/22/ ... -market-2/

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Re: Do I have to buy a house?

Post by interplanetjanet » Mon Jul 23, 2012 7:14 pm

GregLee wrote:I could have bought a place out of town, with a 30-40 minute commute, when I first started work here in Honolulu, but I thought: commuting? never. So instead I rented for 20 years. It was a mistake, because when I finally came to my senses and bought, I still had to commute, but I had to pay over 3 times as much for an out of town house. And making the down payment took almost all my savings. The 20 years of rent I paid? Down the drain.
I think the real lesson here is that all real estate is local. Should you have expected higher than usual appreciation on an island with high construction costs and natural limitations on buildable land? Perhaps. I don't think it was a guaranteed thing either way.

I live in a high cost of living area relative to surrounding towns. There are growth restrictions, new development is seriously curtailed, but one thing that I find interesting is that since 1993 (when I started renting here) rents for single family homes have stayed remarkably flat in real terms, and may have even declined slightly (my rent has been completely flat in nominal dollars for the last 5 years). On the other hand, house sales prices have more than doubled in real terms over the same time period, even counting the crash (such as it was here, things did not drop that much).

Did I waste money by renting? Damned if I know. The mobility was certainly a big help and probably helped my career significantly - the net benefit to my life is likely more than the extra home equity I would have would come to. Then again, I couldn't have bought in '93 (no money for a down payment, no credit history) and just about the time I started to become able to buy, the housing boom was accelerating and it was significantly cheaper to rent.

-janet

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Re: Do I have to buy a house?

Post by GregLee » Mon Jul 23, 2012 7:41 pm

interplanetjanet wrote: I think the real lesson here is that all real estate is local. Should you have expected higher than usual appreciation on an island with high construction costs and natural limitations on buildable land? Perhaps. I don't think it was a guaranteed thing either way.
We should distinguish between expected and guaranteed. I did expect price appreciation. I said it went up over 3 times in 20 years -- is that "higher than usual"? If you say so. But that wasn't my point at all.
Greg, retired 8/10.

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Re: Do I have to buy a house?

Post by Hedonic Regression » Tue Jul 24, 2012 6:12 am

Ketawa wrote:The important thing is I don't know. The data is not clear, and there is value in admitting what one does not know. I am not the one declaring how a complex system will obviously respond to a change in one variable. I hesitate to even call the 2000s increase in housing prices a bubble, since it is easy to point out bubbles after the fact, but not while they are happening. Maybe people were responding rationally to incentives.

We will have to agree to disagree on this issue.

For those who are interested in further reading, several academic studies are linked at this page.

http://blog.lucidrealty.com/2010/02/22/ ... -market-2/
One thing that bothers me about your analysis is that you are plotting nominal interest rates against real housing prices. Inflation was very high in the late 70 - early 80s, interest rates were high due to and manipulated even higher in an effort to tame inflation. Interest rates going down mainly tracked inflation so one wouldn't expect it to have any effect on real housing prices.

The Economist has a much better chart plotting real mortgage interest rates against real housing price movements. http://www.economist.com/comment/1376387

And to quote the article "Low real rates drive asset prices up (say the experts) for the same reason that low yields drive bonds higher. " Their main question is why the economic theory seems to hold up much better in the UK's recent history than in the the US. Something is definitely askew in the US data where housing prices shot up without any real help from low interest rates. Johnny72 is perfectly correct with regards to the theory, and the theory is what is having the Fed keep interest rates rock-bottom.

Of course, economics is all about "ceteris paribus" -- "with all else being equal". The Fed purposely driving down real rates to merely maintain steady real housing prices is a case of things certainly not being equal in 2008-2012 compared to 2000-2007.

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Re: Do I have to buy a house?

Post by Super Hans » Tue Jul 24, 2012 6:57 am

It's great to see so many interesting viewpoints. I'll provide a bit more personal information to answer some of your questions. The dorm atmosphere is one of my biggest annoyances with my rental. Thankfully there's not a lot of noise, but the weekend party scene can occupy all the public areas and the resulting beer bottles and such can litter the common space for days afterwards. I feel I'm getting too old for this. A landlord could eliminate this by requiring a certain rent-to-income ratio and not allowing guarantors for purposes of the calculation. A corporate landlord runs the building. The lease contains severe penalties for early move-out plus a 60-day notice provision. The building is less than 10 years old and everything works fine. Besides my preference for wood floors over carpet (not only for aesthetic reasons, but also for allergies), the physical plant is fine. The washer and dryer en suite was a huge luxury when I moved in from the Upper East Side (where I was paying about 50% more in rent). I could use more space, but rent feels more like consumption than buying, so I'm resisting moving up to a bigger rental. I anticipate I'll stay another year. I can probably negotiate a rent concession of $1 or 2k for the year.

I "ain't from around here," as someone suggested. I don't have a car, which contributes to me not knowing the suburbs at all. I couldn't continue going carless if I moved out of my current neighborhood, so that's an expense that offsets a piece of my rent. Thus the luxury of living footsteps from work costs $2700/month - property tax - HOA fees/house maintenance - car insurance/parking/depreciation/fuel - the interest/investment opportunity cost - the intangible of having a small place. It's still a positive number and probably my biggest expense, but this thought exercise has made me feel better about the splurge. I can't fairly include commuting expenses, incidentally, because my employer covers the expense of a commute by Metro.

I actually had the opportunity to meet Professor Schiller a couple of months ago. I thought he would give me some great insight on my personal housing situation, but things stayed at a very academic level.

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Re: Do I have to buy a house?

Post by VictoriaF » Tue Jul 24, 2012 10:29 am

Super Hans wrote:I don't have a car, which contributes to me not knowing the suburbs at all. I couldn't continue going carless if I moved out of my current neighborhood, so that's an expense that offsets a piece of my rent. Thus the luxury of living footsteps from work costs $2700/month - property tax - HOA fees/house maintenance - car insurance/parking/depreciation/fuel - the interest/investment opportunity cost - the intangible of having a small place. It's still a positive number and probably my biggest expense, but this thought exercise has made me feel better about the splurge. I can't fairly include commuting expenses, incidentally, because my employer covers the expense of a commute by Metro.
I forgot about the transportation subsidy. Take metro to Rosslyn on a weekend and walk around to see apartments in the 10-min walking radius of the Metro station. You can live in Rosslyn without a car.

Victoria
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Re: Do I have to buy a house?

Post by SpecialK22 » Tue Jul 24, 2012 11:06 am

I'm sure you aren't the only one looking at a 10% rent increase + stiff penalties for early move-out and being tempted to buy. The rent situation in particular is why I think property in the DC area has rebounded much better than other parts of the country, but like VictoriaF mentioned government budget issues could act as a negative pressure on housing prices. Still, I'd personally also feel a strong impulse to just go out and buy if a landlord came to me and said something like "so here's the arrangement:"

Rent is now $2970
I want 60 days notice if you are going to move early
If you move out more than six months before the lease is up the penalty is six months' rent, so $17,820 (that's probably much stronger than what the penalty actually is since there's likely a cap, but it sounds more dramatic :twisted:)

Of course being a lawyer I'm sure you realize everything is negotiable. If you can work something like a $2k concession then the overall increase to rent isn't quite as bad.

Continuing to rent or buying each seem to be practical for your situation. Not really profound but maybe if I speak more like Yoda it will be:

Throwing away money, rent is not.
Trapped in one place, buying is not.

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