Is now *Really* the right time to buy?
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Viewpoint 01/20/2010
Is now *Really* the right time to buy?
I’ve heard it a thousand times –
“Now is the best time to buy! Interest rates are at record lows! Prices are at their lowest levels in a decade! Buy for less than the cost of rent! Banks are desperate to get rid of excess foreclosures!”
Personally, we recently helped a couple buy their first home; they were able to move from an 800 sqft apartment into a 1,300 sqft 3-bedroom house with the same monthly payment.
However, all that glitters isn’t gold, there are two sides to every coin, and the full story often differs from the headline. (In my personal example above, the couple moved out of an apartment in the center of Arrowhead and into a home in west Surprise – comparing neighborhoods is like comparing apples with oranges.)
Water Cooler Sound-Bite – this is a long email with lots of detailed thoughts. You can click here to skip ahead to the bottom to read a summary.
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Apples to Apples Comparison
If we’re going to make an informed decision, let’s try to look at our options in an apples to apples comparison. I pulled some data from the MLS in the north and northwest valley – a wide-ranging area of mostly residential neighborhoods covering a diverse mix of neighborhood styles and price ranges.
There were 2,242 single family residence sales in this region during 2009, ranging in price from $39,900 to $3,000,000, and ranging in size from 823 sqft to 8,650 sqft. These numbers confirm this area had a good amount of activity and a wide range of neighborhood types.
Next I wanted to look at a very common, stereotypical property search for somebody who might be renting &/or doing a rent vs buy comparison. I pared the search down further:
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Single Family Homes
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1,800 sqft to 2,200 sqft.
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Currently for rent OR
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Sold between 12/1/2009 and 1/15/2010
To help smooth out variance from outliers, I discarded the most expensive and least expensive home from each list. Here’s what was left:
Number of Transactions:
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14 homes currently For Rent
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29 homes Sold w/in last 45 days, which translates to 19 Sold per 30 days.
Square Footage:
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For Rent (avg): 2,032 sqft
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Sold (avg): 2,017 sqft
Year Built:
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For Rent (avg): 1998
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Sold (avg): 1995
Swimming Pool?
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For Rent – 8 with, 6 without. (57% with Pool)
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Sold – 15 with, 14 without. (52% with Pool)
This is where it gets interesting; the homes which Sold and the homes listed For Rent are almost identical – about as perfect an Apples to Apples comparison as we could have hoped for. Now let’s see which presents the better value..
Cost:
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Average Monthly Rent: $1,389
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Average Sold Price: $216,436
Uh oh. Comparing monthly rent with total sales price isn’t apples to apples, so let’s make some assumptions and break the Average Sold Price into a monthly payment. Let’s assume:
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FHA financing using the minimum 3.5% down payment.
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$216,436 * 3.5% = $7,575 Down Payment Required
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1.5% FHA Up-Front Mortgage Insurance Premium (added to the loan balance) = $3,133
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$216,436 purchase price – $7,575 down payment + $3,133 FHA UFMIP = $211,994 Mortgage
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30-year, fixed-rate, fully amortized loan
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5.15% interest rate, per bankrate.com
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$1,154.54 Monthly Mortgage Payment, principal & interest only.
The mortgage payment alone looks like it favors buying over renting. Now let’s account for Taxes, Insurance, and HOA fees:
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Add FHA Monthly Insurance Premium. 0.5% of the loan balance, divided by 12: $211,994 * 0.005 / 12 = $88.33 per month.
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Add Property Tax. Assume $2,000 per year, divided by 12: $2,000 / 12 = $166.67 per month. (note, taxes vary by city and neighborhood; this is an estimate.)
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Add Homeowners Insurance. Assume $600 per year, divided by 12: $600 / 12 = $50 per month. (note, insurance premiums vary by property, homeowner, and insurance company; this is an estimate.)
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Add HOA Dues. Assume $35 per month. (note, HOA dues vary from neighborhood; this is an estimate.)
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Add Renters Insurance. Assume $250 per year, divided by 12: $250 / 12 = $20.83 per month.
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Assume the remaining bills, such as power, water, cable, etc., are the same regardless of rent vs own, so we won’t look at these for comparison purposes.
All-in Monthly Rent: $1,409.83 = $1,389 rent + $20.83 insurance.
All-in Monthly Ownership: $1,494.54 = $1,154.54 mortgage + $88.33 FHA insurance + $166.67 property tax + $50 homeowners insurance + $35 HOA dues.
** Possible Tax Advantage **
The homeowner in the above example will pay $10,847 in mortgage interest during the first 12 months. If this homeowner itemizes deductions, and if this homeowner has an average tax rate of 12.5%, he’ll receive a reduction of income tax of $1,355.81 for the year, or $112.98 per month. This would reduce the monthly ownership cost to $1,381.56. Consult with your tax preparer for details as they may pertain to your own situation.
Advantages for Renting today
So the homes available for rent and purchase are very similar – size, year built, swimming pool, monthly cost; why would somebody choose to rent?
Market Uncertainty. There are no guarantees at this point that the real estate market won’t have another bumpy year or two (or three.) It makes sense to rent if you are convinced home prices are heading downward.
Life Uncertainty. Renting can make sense if you’re unsure what your future holds in store for you, or where you’ll be a couple-few years from today.
Short-term Needs. You’re moving to town for a specific reason & a specific length of time, then you’ll head back home. Or you’re actively planning to move – maybe as soon as somebody retires, finishes school, has a baby, etc.
Limited Risk for Major Expenses. Generally speaking, the homeowner &/or landlord will be responsible for major expenses that come with homeownership: new A/C unit, new roof, new carpet, exterior paint… basically anything expensive that might come up out of the blue.
Flexibility. Neighbors become too much to handle, or buy a dog who barks non-stop? Move. Principal leaves and your kids’ school goes downhill? Move. Get a new job half-way across town? Move.
New Experiences. Some people like the excitement of moving into a new neighborhood – What are the people like? Where’s the local coffee spot? Who uses the local mountain/greenbelt trail?
Keep it Simple. There’s something to be said for keeping things simple – a nice, clean, minimalist approach, and those who move more frequently are less likely to buy/own large pieces of furniture. Not to mention the amount of clutter we all get rid of every time we move!
Can’t Buy. Buying requires a down payment (in most cases) and qualifying for a mortgage, which requires ‘acceptable’ levels of debt, income, and credit. Many people rent while they work on getting these 4 factors into buying-shape.
Hmmm, turns out there are some good, solid reasons to rent instead of buying..
Advantages for Buying today
“Buying builds equity” – we’ve had that phrase burned into the deepest parts of our very being, but is it true? Those who bought between 2004 and 2008 might have an argument against.. Let’s take a look at reasons to buy today:
Prices at or Near Bottom. Home prices today are lower than they’ve been in a decade in many areas.
Interest Rates at or Near Bottom. The loan we discussed earlier – the one with a 5.15% interest rate and a $1,158 payment – would carry a payment of $1,340 at 6.5% (historically a low interest rate.) and $1,482 at 7.5%. (and if interest rates fall further, you could refinance and take advantage of a lower payment.)
Equity over the Long Term. Let’s say, just for the sake of argument, that prices drop 10% and then hold steady for the next 30 years. Your $216,000 home would only be worth $194,400. But your mortgage would be paid off – you’d still have $194,400 in equity that you wouldn’t have by renting!
Long-term Planning. Buying gives you the opportunity to retire without a mortgage/housing payment. Or to rent the house out later and have positive income.
Stability. It’s ok to have roots; some people would even say it’s better. My parents bought our home when I was 3 or 4 years old, and lived there until my mid-30’s. My memories from childhood, grade school, high school, coming home during college breaks, and bringing my family home for the holidays, all revolve around the same home & neighborhood, and I love that.
Fixed Monthly Expenses. The $1,158 mortgage payment we’ve discussed will be the same in 5 years, 10 years, and 29 years, until it eventually disappears altogether. On the other hand, that $1,389 rent payment might become $1,500, $2,000, or even more over the next 3 decades.
Pride of Ownership. In general, most people tend to “go the extra mile” when their name’s on the line. (in this case it’s the dotted line.) More effort goes into landscaping, upgrades, and general maintenance. Over the long run this adds value to the house, and if the neighbors follow suit it can add value to the entire neighborhood. It also gives you a nicer place to live.
Long-term, buying will beat renting every time. And given today’s prices & interest rates, it’s hard to argue against buying today if you have a long-term time horizon.
Water Cooler Sound-Bite (Can you boil this down to a sound-bite I can quote to my friends?)
“There are strong arguments on both sides of the coin. The job market will be weak for the next several years – if you’re nervous about losing your job or having to move, renting might make better sense. But if you’re looking long-term, today’s low prices and low interest rates make buying a home a great decision.”
I hope you enjoyed today’s e-newsletter. Please feel free to leave a comment or opinion online by using the form at the bottom of the online version, found here.
Your believes in “your home is your castle”, regardless of whether the castle is owned or rented Realtor,
Chris Butterworth
Chris & Heather, The Phoenix Agents
at Thompson’s Realty
http://thephoenixagents.com
623-570-9940
Chris Butterworth and Heather Barr are The Phoenix Agents at Thompson’s Realty. The Phoenix Agents are Realtors in the Greater Phoenix area, who have built a loyal following over the years by offering superior service levels coupled with a low-pressure approach. You can visit http://ThePhoenixAgents.com online to learn more about Chris, Heather, and the Phoenix-area real estate market. If you have real estate questions or needs, please contact us anytime; we’d love to hear from you.
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