Apr132012
Two good reasons to keep renting in 2012
I still rent. I own investment properties, but I still rent my primary residence. In all likelihood, the properties at the mid to high price points common in Irvine will continue to come down over the next few years, so there is little urgency. I am enticed by the low interest rates and the historically low cost of ownership, but there are advantages to renting that shouldn’t be overlooked.
There are two good reasons to rent in today’s market: (1) prices are still going down, and buying may result in a loss of equity, and (2) buying today sacrifices mobility. The problem of falling prices is overcome by those with a long ownership period. Locking in a low monthly cost of ownership is its own reward. Giving up mobility can be overcome by obtaining a property with a significant discount from rental parity. Those properties can be rented if a buyer needs to move. People who don’t plan to own long or are paying a premium to rental parity will likely be very disappointed.
The Case for Remaining a Renter
Apr 04, 2012, 12:07 PM — By Quentin Fottrell
The combination of super-low house prices and rising rents might raise the appeal of home ownership for some.
Low house prices, low interest rates and rising rents do conspire to make owning a better choice financially than renting.
But economists say there’s a strong case to be made for remaining a renter.
There is also a strong financial argument to be made for remaining a renter. As price fall, home ownership becomes even less expensive, and renters don’t burn any equity be remaining renters.
Real estate agent surveys suggest low prices are encouraging first-time homebuyers to take the plunge, the Wall Street Journal reports. Average apartment rents increased 2.7% in 2011 while the national vacancy rate dropped below 5% for the first time since 2001, according to a quarterly survey by real estate firm Reis. But some analysts remain skeptical. For many, they say it may never make sense to buy.
The U.S. government has long encouraged home ownership through tax breaks and other incentives. Prior to the housing bust, this led a generation of young Americans to invest their life savings in property, says Sheldon Garon, a professor of history at Princeton University and author of “Beyond Our Means: Why America Spends While the World Saves.” In other prosperous countries, renting is more often the norm, he says. “Americans should beware of the hype that they’ll get huge tax breaks for owning a home,” he says. Two-thirds of taxpayers don’t itemize deductions on their annual income tax returns “and, thus, benefit in no way from the vaunted mortgage deduction,” he says.
Further, many loan owners who do take the home mortgage interest deduction pay so much more for the house that the subsidized cost of money still exceeds the cost of a rental. At the peak, people were paying $4,000 a month to get $1,000 a month in tax breaks when they could rent the same house for $2,000 a month. In other words, people paid a premium to get a tax break. How stupid is that?
Would-be homeowners also may not want the added expense that comes with maintaining a house.
Particularly now that the housing ATM is shut off and the house won’t pay for itself.
As long as renters avoid real estate brokers – who can charge up to 17% in cities like New York – they only need a damage deposit, says Mark J. Perry, professor of economics at University of Michigan-Flint. Most banks require 10% to 20% of a home price for a down payment, and that doesn’t include legal fees, maintenance like AC Maintenance and plumbing repairs down the road. “Many people don’t have the credit to buy a house, but do have adequate credit for renting,” Perry says. But Pete D’Arruda, founder and president of Capital Financial Advisory Group in Cary, NC., says low prices are a big incentive for people to build their credit score.
There are, of course, plenty of reasons to want to own real estate. For one, D’Arruda says, mortgage interest is tax deductible. “Turn the tables on banks and lock them into a rate of below 4% for 30 years,” he says. “That’s a great protection against inflation. Does that mean house prices won’t go down again? Probably not, but it’s better to buy a low point.”
Which is better, a low cost of ownership or a low purchase price? The two may not go together. For instance, someone buying today at 4% interest may have a lower cost of ownership than someone buying four years from now at a 6% interest rate even if the buyer four years from now pays less money. The answer really depends on your term of ownership. People who plan to live in the house for three to five years should not buy because prices may be lower when they need to sell. People who plan to own for more than ten years should lock in the lower cost of ownership even if they pay a premium price to do it. They make it back in savings over time.
However, as the job market shows only tentative signs of recovery, financial advisers say there is still a big need for people to move for work. “Renting helps with that mobility,” says David Abuaf, chief investment officer at Hefty Wealth Partners in Auburn, Ind. “If you own a home, picking up and moving is a much more involved and expensive process.” Corbett says people who need to move because of a new job usually need to do so within 30 days. “Renting gives you that luxury and also protects you from having to sell a home that may not be valued at the price you paid,” he says. With prices still weak, he says homeowners will have to wait a long time for a return on their investment: “Renting will save you from incurring thousands of dollars of closing costs on selling.”
Mobility is the primary reason to rent. It always has been. Only during the crazy days of the bubble rally when prices rose very quickly could buyers escape within a year of buying without losing money on transaction costs. Real estate can be very illiquid, as many underwater loan owners are seeing now. Back in 2004 nobody thought about liquidity. There were always buyers willing to pay any price to own a home, so getting out was easy if necessary — not today. Anyone buying today must recognize they are giving up their freedom of movement for the foreseeable future.
With 30-year mortgages and flat house prices, the accumulation of home equity happens slowly, so the historical advantage of ownership may no longer applies, Perry says. “The S&P 500 is up by about 12% so far this year, offering a much better return than home prices,” he says.
When factoring in maintenance costs, transaction costs, and mortgage interest, owner-occupied real estate is typically not a good financial investment. Only in our era of inflated house prices and HELOC abuse has made owner-occupied housing seem a better investment than it really is. The crash in prices over the last several years may have removed some of the kool aid, but once prices start to go back up, watch out, the dumb and thoroughly discredited fallacies of the housing bubble will be touted by realtors and accepted by the eager masses looking for a free ride.
IR: nice post.
Also, smart money will keep renting as long as housing remains a socialized industry. An industry where bureaucrats and regulators dictate market dynamics that benefit: 1) self-interests 2) insiders(constituents) who’re allowed to ‘game the system’ at the expense of wage earners.
If the new supply of rentals from apartment construction and the REO-to-rental program caused rents to weaken, it will further weaken home prices as rental parity drops. Buying during a period of declining rents is nearly always a bad idea.
“Show me the note” is officially dead as a foreclosure defense.
Attorney Fined More Than $50,000 for Frivolous MERS Lawsuits
A Minneapolis-based attorney has been sanctioned by a federal judge for filing one, in what appears to be a series of nearly 30 lawsuits based on what the court says are frivolous “show-me-the-note” defenses designed to thwart foreclosure proceedings in Minnesota – namely by calling into question the validity of MERS as mortgagee and authorized nominee of the noteholder.
U.S. District Court Judge Patrick J. Schiltz has ordered William B. Butler of Butler Liberty Law, LLC to personally pay $50,000 to the court and pay an additional undetermined amount of legal costs incurred by counsel for MERS and its co-defendants.
District Court Judge Schiltz also dismissed several lawsuits filed by Butler and has forwarded a copy of the court’s order to the Minnesota Lawyers Professional Responsibility Board for review.
In Welk, et al. v. GMAC, District Court Judge Schiltz found that attorney Butler had “made a cottage industry out of filing frivolous show-me-the-note actions” despite the fact that “this argument has been rejected by the Minnesota Supreme Court, by the United States Court of Appeals for the Eighth Circuit, and by every federal judge sitting in Minnesota who has addressed the argument.”
As explained by the court, a “plaintiff bringing a show-me-the-note claim generally argues that, because the entity that holds her mortgage (say, MERS) is not the same entity that holds her note (say, U.S. Bank), the mortgage on her home or the foreclosure of that mortgage is invalid.”
District Court Judge Schiltz ruled that the sanction of $50,000 was justified due to “the extraordinarily egregious and brazen nature of Butler’s conduct” through his pleadings and harm done to his clients by “exploiting them financially” by earning fees “if multiplied by the number of cases he has brought, indicated he has earned tens (or even hundreds) of thousands of dollars marketing show-me-the-note cases over the Internet.”
“Federal Judge Patrick J. Schiltz set an example with his very strong warning to attorneys who take advantage of foreclosed borrowers and give plaintiffs false-hope when they chose to file baseless lawsuits against MERS,” commented Janis L. Smith, VP of corporate communications for MERS’ parent company Merscorp Holdings.
“Cleary, there is a steep price to be paid for lawyers who prey on consumers who are experiencing financial difficulty and waste the Court’s valuable time with unsupportable attacks on the MERS system.”
49% of borrowers say paying the mortgage is not a priority.
Strategic Default Here to Stay Despite Improvements, Risk Managers Say
With reports that around 20 percent of mortgages are underwater, about 46 percent of bank risk professionals surveyed by FICO expect to see the volume of strategic defaults in 2012 exceed 2011 levels.
“After five years of a brutal housing market, many people now view their homes more objectively and with less sentimentality,” said Dr. Andrew Jennings, chief analytics officer at FICO and head of FICO Labs. “Regardless of legal or ethical issues around strategic defaults, lenders must account for this risk when they evaluate mortgage applications in declining markets. Many homeowners who find themselves upside down on mortgages in the future are likely to consider strategic default as an acceptable exit strategy.”
Combined with concerns over strategic default are disconcerting results about consumer priorities. Only 29 percent of bankers said the current generation of homeowners considers their mortgage to be their most important credit obligation, while 49 percent said its not a priority.
Even with this discouraging data, 53 percent of survey respondents expect to see the housing market improve by the end of 2012, compared to 24 percent who said the market would deteriorate.
Also, 64.8 percent of respondents think mortgage delinquencies will decrease or stay the same, an 11.3 percent increase from the previous quarter.
“If job creation continues, banks will be more likely to embrace mortgage lending once again. A healthy job market is essential for improving the quality of mortgage applications and reducing default risk,” said Jennings.
Most respondents, 56 percent, expect demand for residential mortgage credit to exceed supply over the next six months. A similar majority, 53 percent, project demand for the supply of credit for mortgage refinancing surpass supply.
The survey included responses from 263 risk managers at banks throughout the U.S. in February 2012 and was a joint effort between FICO, provider of analytics and decision management technology, and the Professional Risk Managers’ International Association, a nonprofit that works to define and implement the best practices of risk management through education.
49% of borrowers say paying the mortgage is not a priority.
Now you wonder why banks are really tightening the underwriting process, which is just really the old underwriting process pre-1995. I guess I just defended the banks. It might also rain cats and dogs today so watch out.
This doesn’t bode well for FHA loans.
I rent a nice condo for $600 a month and don’t plan on buying any time soon. There are some really nice houses for cheap in Vegas but I don’t want to drive 45 min. each way to work. I also just had my garage, sink, and garbage disposal fixed at zero cost to me.
There is a significant savings by owning in Las Vegas compared to renting. Doesn’t that entice you?
The Fed and their greasy (hidden) policies leave little room for free markets to take over the bond market.
At some point the banks will have cleaned up their balance sheets (due to trillions in federal reserve welfare), and they will start releasing reserves … the Fed will be forced to raise interest rates as the public will politically scrutinize the rise in goods and services. But make NO mistake in thinking Orange County real estate will benefit in an inflationary environment (at least NOT in the short run), as higher mortgage rates will stomp out the potential for higher prices.
This is simple math, buyers will NEVER be priced out. That is a ploy by the REIC used to create urgency. If the housing market were to lose the ability to transfer to the next generation of buyers, it would die .. and prices would collapse, not rise.
The “priced out forever” meme never made sense to me. Priced out buy whom? Someone somewhere has to be doing the pricing out. The entire market cannot be a move up.
Good point Lee. I see lots of people who have been sitting on the fence the last few years are getting very antsy about buying. We hear stories…multiple offers, record low inventory, blah, blah, etc. This is not a normal market in any way shape or form. NOBODY will be priced out if they don’t buy today. Any healthy market needs move up buyers for it to work…this cycle is currently completely broken.
Throw in artificial low rates that only can go up, massive distressed inventory in the pipeline as far as the eye can see, a new crop of “government sponsored subprime” buyers who have no business buying RE, the under 30 crowd that is in no shape to buy anytime soon and overall awful shape this country is in financially. People are crazy if they really think the OC home price appreciation train has already left the station. Is that 500K shitbox going to be worth 600K two years from now? Think about that. Give me my lease renewal so I can sign it today!
Sometimes it is helpful to remember that the lending industry in all its width and breadth conducts the same out of control behaviors in lending and taking collateral (or no good collateral, often) in just about every human endeavor. This is true of lenders from “loan sharks” “hard money lenders” and “respectable” national banks. The recent surge of insane loans to bad credit individuals on credit cards and especially in personal passenger cars sales shows no one has learned anything, including bank authorities and regulators. Now, sometimes ochousingnews has pointed out sharply that 40% of Americans will borrow every penny offered and more, on any terms available, regardless of the burden on them of trying to repay the loan ever or the overall predictable risk of systemic collapse from any small recessionary shock. Those same borrowers then claim “predatory” lending and seek excuses for the fact they vastly overborrowed and especially some way not to repay or to do so timely as a priority or obligation. Here’s an example of multi million dollar borrowing at high rates by someone with a most tenuous employment, make of it what one will: http://www.thepostgame.com/features/201204/bryant-mckinnie-nfl-lockout-loans-ravens-vikings
He was locked out—unemployed–and borrowed multiple millions? To sustain a lifestyle? Wonder what his mortgage payment is?
Instead of being a “virtuous circle” where excellence, honesty, intelligence, and genuine ability are rewarded and their opposites punished (or at least not rewarded), our culture has become a “vicious circle”, a downward spiral where the dumbest or most dishonest and criminal are rewarded while the able, the honest, the productive are punished.. or hardly rewarded except at a neighborhood awards ceremony or some such.
One of the major contributing factors is the ease with which a very ordinary, dumb person can become an entertainment or sports “celebrity” making hundreds of millions of dollars for appealing to the bottom half of the population, thanks ONLY to the miracle of electronic distribution. Meanwhile, able, intelligent people extensively educated in ultra-demanding scientific and engineering disciplines are often unemployed. A nuclear engineer makes perhaps $200,000 a year, and people trained as scientists are often “post-doc for life” , and spend most of their working lives toiling as low-paid lab assistants and assistant professors.
Thus, as these extremely undistinguished people and the “entertainment” they provide, dominate our culture by the sheer volume of money their images generate, their challenged audiences become even dumber. Stupidity becomes a virtue (“keep it simple stupid”), and our schools, more and more driven by market considerations, simplify their curricula to cater to the increasingly challenged students filling their classrooms. So the population becomes still dumber- it has been proved that a lack of intellectual stimulation and challenge will cause a decrease in I.Q.
Rinse and repeat for three generations or so.
Then wonder why you have a population of extremely dumb, emotion-driven, gullible, and extremely unproductive people who indulge themselves and each other in fantasies that they are somehow “exceptional” and can “make our own reality as we go along”. Wonder why your country can only make a living on scams and increasingly degraded “entertainment”, and why there is no momentum behind the confused, chaotic “Occupy” movement to restore a semblance of honesty to our financial system, or why it has no single strong leader capable of articulating that aim.
Laura,
Sad but true. It extends into much of the corporate world.
The emperor and/or some of his ministers have no clothes and you will get fired from many places, but first they will slander and degrade you.
I’m with Laura 100%. I couldn’t have said it better myself.
I was certainly one of those idiots who used the “tax benefit” to justify and rationalize the high price of the home we bought. We pay ~$4,800 in principal, interest, and property tax and we pay ~$1,700 less in federal and CA income taxes because we’re able to itemize the interest and taxes (even though AMT takes back ~$400 monthly).
We couldn’t rent our place for $3,100. It would probably rent, optimistically, for $2,800. However, if just our second lien gives us a rate reduction to 5.25% through the National Mortgage Settlement, then we’re very close to rental parity. If the first does the same, we’re below rental parity! 🙂
It’s been a rough ride, but I’m glad it will work out for you. The government loan modification programs were designed to help people like you who bought conservatively but at the wrong time. Rather than being a catastrophe, the crash is merely becoming an inconvenience.