Foreclosures Slowing?
Residential house foreclosures slowed down. They're not actually down. They're just not foreclosing as many homes as had been the case for a while. Will this trend keep up? Who knows?
Too many people took on too much debt, probably buying too much house. Now many of them are paying a steep price. They may lose their homes.
Which brings up the whole idea of owning a home: Is it always a good idea? That's been the accepted wisdom here in the U.S. - at least some claim this. And, if you remember, the government pushed down mortgage rates and encouraged (in some cases forced) banks to lend money to people who really couldn't afford their own homes. The idea was simple: it's better that people own their own homes - always.
Why don't we look and see if that's really true...
"Home Ownership Was Never a Road To Riches" appeared in a recent Wall Street Journal article. It's got some good information, but some really misleading statements as well.
It's main point, that you don't get rich owning a home should be obvious to you. If it's not, now you know.
But what about this whole idea that you really must own your own home - that it's always better if you do? In many cases that's true. But owning your own home may not be for everyone.
Anyway, the author of the article goes about analyzing his own home purchases (4 of them) and concludes he's made about 3% overall - not counting, of course, his most recent purchase which is down quite a bit. Our guess is he's probably flat and will wind up losing money, based upon the sort of calculations he seemed to be making.
At one point, the author quotes someone from the Columbia University Business School who "has studied housing markets." Naturally, the expert shows that under most circumstances - if you don't count this crash in real estate that's going on now, owning a home if best for all - financially speaking. But I noticed a glaring omission in his argument.
In fact, I think it may be the #1 mistake people make about the cost of owning a home comes in. The expert doesn't count in the "lost opportunity cost" of owning a home. That's the money you could have made over time by investing your down payment in something else instead of putting it into the house. And it doesn't include any money you spend over and above an equivalent rental. You might have invested that too.
I also note that the author, while he counts the costs of his "home improvements" doesn't say too much about maintenance costs. These add up, sometimes rather considerably, over time, as well. And these are costs you mostly would not incur if you lived in an apartment.
One last point: most people buy more home than they really need. On the other hand, they probably would not rent more apartment than they need. You really can't quantify this, but it too can be a significant number.
So where does this leave you? Should you rent rather than own? Answer that question by asking yourself how you want to live and consider what that's worth to you.
Using round numbers, we've found that homes cost about 10% of the purchase price per year. So if you buy a house for $400,000, it's going to cost you $40,000 a year. I know it seems like a lot, buy when you count the cost of a mortgage and that opportunity cost we mentioned above, you'll find it's pretty accurate. And it's a lot more than most home owners think they're spending. (And it also doesn't factor in that concept that people tend to rent less space than they buy.)
So if the way you really want to live is worth 10% a year of the purchase price of the home, go ahead and buy. Just make sure you buy prudently buy putting down a large enough down-payment and don't take an adjustable rate mortgage that will push up your monthly payment to a level you really can't afford. (Adjustable rate mortgages aren't always and everywhere a bad idea - but they are for most people in most circumstances.) You don't want to wind up facing foreclosure some day.
Oh, and please don't kid yourself about your home being a great investment.
Too many people took on too much debt, probably buying too much house. Now many of them are paying a steep price. They may lose their homes.
Which brings up the whole idea of owning a home: Is it always a good idea? That's been the accepted wisdom here in the U.S. - at least some claim this. And, if you remember, the government pushed down mortgage rates and encouraged (in some cases forced) banks to lend money to people who really couldn't afford their own homes. The idea was simple: it's better that people own their own homes - always.
Why don't we look and see if that's really true...
"Home Ownership Was Never a Road To Riches" appeared in a recent Wall Street Journal article. It's got some good information, but some really misleading statements as well.
It's main point, that you don't get rich owning a home should be obvious to you. If it's not, now you know.
But what about this whole idea that you really must own your own home - that it's always better if you do? In many cases that's true. But owning your own home may not be for everyone.
Anyway, the author of the article goes about analyzing his own home purchases (4 of them) and concludes he's made about 3% overall - not counting, of course, his most recent purchase which is down quite a bit. Our guess is he's probably flat and will wind up losing money, based upon the sort of calculations he seemed to be making.
At one point, the author quotes someone from the Columbia University Business School who "has studied housing markets." Naturally, the expert shows that under most circumstances - if you don't count this crash in real estate that's going on now, owning a home if best for all - financially speaking. But I noticed a glaring omission in his argument.
In fact, I think it may be the #1 mistake people make about the cost of owning a home comes in. The expert doesn't count in the "lost opportunity cost" of owning a home. That's the money you could have made over time by investing your down payment in something else instead of putting it into the house. And it doesn't include any money you spend over and above an equivalent rental. You might have invested that too.
I also note that the author, while he counts the costs of his "home improvements" doesn't say too much about maintenance costs. These add up, sometimes rather considerably, over time, as well. And these are costs you mostly would not incur if you lived in an apartment.
One last point: most people buy more home than they really need. On the other hand, they probably would not rent more apartment than they need. You really can't quantify this, but it too can be a significant number.
So where does this leave you? Should you rent rather than own? Answer that question by asking yourself how you want to live and consider what that's worth to you.
Using round numbers, we've found that homes cost about 10% of the purchase price per year. So if you buy a house for $400,000, it's going to cost you $40,000 a year. I know it seems like a lot, buy when you count the cost of a mortgage and that opportunity cost we mentioned above, you'll find it's pretty accurate. And it's a lot more than most home owners think they're spending. (And it also doesn't factor in that concept that people tend to rent less space than they buy.)
So if the way you really want to live is worth 10% a year of the purchase price of the home, go ahead and buy. Just make sure you buy prudently buy putting down a large enough down-payment and don't take an adjustable rate mortgage that will push up your monthly payment to a level you really can't afford. (Adjustable rate mortgages aren't always and everywhere a bad idea - but they are for most people in most circumstances.) You don't want to wind up facing foreclosure some day.
Oh, and please don't kid yourself about your home being a great investment.
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