More Reasons Why The Bubble Is Popping & Buying Myths Debunked
An Excellent write-up by a fellow blogger on Friday points out many reasons why the U.S. is experiencing a bursting of the housing bubble. The entry also goes on to discuss 43 points that doubters of a housing bubble postulate and reasons why they are wrong, point by point. Definitely a good read for skeptics of a housing bubble and housing speculators alike. Here's an excerpt:
"There are great tax advantages to owning."
FALSE. It is now far cheaper to rent a house in the San Francisco Bay Area than it is to own that same house, even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost about $700,000. Assume 6% interest we can see that a buyer loses at least $4,936 per month by buying. Renting is a loss of course, but buying is a much bigger loss.
Renting:
Rent: $1,800
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Monthly Loss: $1,800
Buying:
Property Tax: $486 ($729 per month at 1.25% before
deduction, $486 lost after deduction.)
Interest: $2,333 ($3500 per month at 6% before
deduction, $2333 lost after deduction.)
Other Costs: $450 (Insurance, maintenance, long commute, etc.)
Principle loss: $1,667 (Modest 3% yearly loss on $700,000.
Reality will be much worse.)
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Monthly Loss: $4,936
This is a very conservative estimate of the loss from owning per month. If you include a realistic decline in house prices, as in this rent-vs-own calculator, you'll see that owning right now is a very poor choice.
Remember that buyers do not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them.
Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.
Under current conditions, a renter would be able to live in a Bay Area house for 30 years, then buy that $700,000 house outright with the saved principal payments and have avoided $810,846 in interest payments. Rent would be only $648,000 over those 30 years, so the renter comes out at least $162,846 ahead. See an "amortization table" if you don't believe that interest will cost more than the house. This doesn't even count the huge losses the owner will suffer as the value of his house falls year after year for the next decade or more, just as in Japan, nor property taxes, insurance, and maintenance.
Rents will rise eventually, even though they have been falling every year for about five years now. Rising rents should be more than offset by appreciation on the renter's saved principle payments, assuming the renter invests in index funds or any other investment that brings in more than a CD.
There is no need to wait 30 years to buy a house. As this crash accelerates, prices will fall to the point where it is cheaper to buy than to rent, though that could take five years or more.
If you don't own a house but want to live in one, your choice now is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. It is much cheaper to rent the house than to rent the money.
There are large tax disadvanges to buying in California. Because of Proposition 13, more properly called "screw the newcomer", it is common for new buyers to pay ten times the property tax that their neighbors pay. Tax rates are set at the time of purchase, which means those who bought long ago pay essentially nothing, and the new buyers pay all property tax for everyone else. Upgrading houses makes you a newcomer all over again.
Then there's earthquake insurance. It's really expensive, so most people just skip it and risk everything on the chance that no earthquake will happen.
