I sent my post to the owner of Patrick.net - Patrick Killelea and also to my realtor to get their response. Then I sent my realtor's response to Patrick. Patrick was kind enough to comment (pretty funny). Here is what I got. I am still leaning toward renting as I think there is always a conflict of interest with realtor (any of them - good or bad) - as they only make money if you buy a place.
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Patrick's response
Hi Lei,
did you try the NY Times calculator?
http://www.nytimes.com/interactive/business/buy-rent-calculator.htmlI think it's important to:
- Not assume you'll be there 30 years. Average ownership is only 7 years.
- Not assume ANY appreciation. It could just as well depreciate. Also, rents could just as well fall. My own rent is less now than it was 11 years ago, for the same house.
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My realtor's response and Patrick's comment on her response
I think your blog is very interesting. Well, I suppose I can’t help it since it is my business = ) I believe in having the right reasons in buying a home so expectations are managed. More often than not, one is buying a home to set up “roots” where they can live for many years, be part of a community and raise a family. The American Dream. Have something constructive, something you can actually touch and feel. Then later pass on to your children, for them to have something to start their lives with.
Patrick: That's all very manipulative button-pushing, hoping to trigger emotional responses to get a irrational payout from the Lei Han ATM machine...
In addition to actually having a roof over your head and a place to sleep, here are some other points to consider why homeownership makes sense.
1) Principal pay down, Equity Build up and Appreciation – In a 30-year fixed loan – in 30 years of paying mortgage, you are paying the principal down, and you are building equity in the process. The home will be free and clear and it will be yours in 30 years!
(Patrick: And perhaps worth less than you paid, even in 30 years. See Japan.)
It can be sooner if you paid twice a month and pay it off in 15 years!
(Patrick: That much is true.)
It will appreciate in value- definitely! In 30 years – history has shown that to be true. In renting for 30 years one will have nothing to show for the payments being made and will most likely still need to rent.
(Patrick: Absolutely mathematically wrong. If you save money every month by renting, you have the money. Someone is willing to use you for a commission...)
2) If you are worried about getting tied down – you can rent the home and have the tenant pay your mortgage – Great Investment! That is why buying in a good neighborhood is important because you can find a tenant should the need arise.
(Patrick: Right, you can rent it out for half as much as your monthly expenses... Not a good deal, except for the realtor who is long gone with your commissions. Yes YOU pay the commission. All money comes from buyers.)
3) Cheap Money – currently interest rates have been the lowest in 35+ years! When interest rates move up to say 7% that same home of $650,000 with 20% down - your mortgage will be $ 3,439.51. It will cost you approximately $1,000 more for that same house!
(Patrick: No, if rates surge prices will fall to compensate. Though it is possible that rates will rise because salaries are rising too quickly for the Fed, in which case prices could go up even with rising rates. But you'll get a lot of warning if that's going to happen. Currently, we have falling salaries, not rising.)
4) Leverage – where can you tie up a piece of property worth $650,000 with as little as 3.5% down ($22,750) – an FHA Loan. Of course depending on the buyers credit worthiness, and yes there are closing costs to consider, mortgage Insurance … but it is possible. The banks will lend the buyer $627,250 to buy that particular home. And eventually should they make their payments as scheduled, they get to own that home in 30 years! I think that is amazing!
(Patrick: Yeah, and think of the massive amount of money you could lose with leverage too.)
5) Homeowners as compared to tenants tend to enhance the quality of communities because most have pride of ownership, they tend to maintain their homes better, they contribute more to their communities, parks and churches and because of these, their communities have better home values… unlike transient communities that have high rates of tenancies. A majority of tenants don’t care since they don’t own the home.
(Patrick: Several studies have proven that there is actually no measurable benefit to the community from owners. In fact, they're usually more stressed out about their mortgage to take much of an interest in anything else. 70% of people in Switzerland rent, and they're not dumb.)
(Patrick:Real estate is the worst possible investment. You should buy only if: 1. You can easily afford it.; 2. It's cheaper than renting the same thing.)
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My 2 cents: I have heard this sales pitch from Realtors many times, but I think it doesn't present a balanced view. All the headache with owning a place is not highlighted and so many people rent in the bay area that I don't think her last argument#5 holds. You can almost as easily rent in a good neighborhood as buy in the same neighborhood in the Bay Area.
Also #3 doesn't make sense. If interest rate goes up t0 7%, then housing prices will come down as there are less buyers in the market so sellers has to compensate by lowering their price if they have to sell. I much rather buy the house at a lower price and pay the high interest initially because I can always refinance when rates decrease. I can NEVER readjust my purchase price once I buy the house.
#2 sounds cool but I don't know any home owners who are renting their house out for a profit in the bay area and I believe you lose some of the tax benefit if you rent it out vs. living in it. I don't think your interest is tax deductible any more except for the difference between your rental income and the mortgage. A big negative!
Anyways, will keep you posted on where I land - so far renting still works for us :-)
Lei
