Renting vs. buying

(article via the truth about mortgage)

This is certainly an intimidating question, and one that’s difficult to sum up in one post, but I’ll do my best to cover as many pros and cons for each as possible (feel free to add more in the comments section!).

These days, home prices are well off their recent (ridiculous) highs and mortgage rates continue to break new record lows, which is surely making many renters salivate at the notion of homeownership.

After all, if you can buy a home for $100,000 less than your future neighbor while also snagging a mortgage rate several percentage points better than theirs, you’d be in pretty good shape, right?

[See the latest mortgage rates from dozens of lenders, updated daily.]

That’s the hope, barring a complete implosion on the economic and housing front.

But nothing is ever that easy, is it? With homeownership comes responsibility, while renting may be relatively carefree.

Pros Of Renting

Let’s start with the beauty of renting an apartment or a home. When you rent, you pay a landlord a certain dollar amount each month.

Put simply, this dollar amount is typically less than the going cost of a mortgage, assuming you factor in the insurance and taxes. Oh, and the maintenance.

Sure, a mortgage may appear cheaper, but guess what happens when your toilet breaks? You can’t call your helpful resident plumber and get a free fix.

You’ll either have to get down with some DIY or open your checkbook. So renting, while seemingly the same price or even more expensive than owning, might still wind up cheaper.

There’s also a huge psychological freedom to renting. You aren’t locked in for 30 years. At most, you probably have a 12-month lease agreement. And there’s even a good chance you’ve got a month-to-month deal in place.

In short, you won’t feel trapped, and you can freely move on if you want/need to for any reason, such as job relocation, downsizing, upsizing, etc.

This should make it a lot easier to sleep at night.

Cons Of Renting

On the other side of the coin, renting seems to be synonymous with temporary. If you want to establish a household, renting an apartment or a home might not be the best way of going about it.

You might also be limited to what you can do to the unit. Pets aren’t allowed? You can’t paint the place? You can’t do X, Y, or Z?

Oh, and those rent payments never stop – sure, 30 years is a long, long time, but your lifetime will probably be longer.

There won’t be any relief in retirement when you rent – you’ll keep paying your landlord for “as long as it takes.”

And at the end, you won’t have anything to say for it, no home equity or ownership, despite all those payments. Nothing to hand off to your kids or to sell for cash proceeds.

Additionally, your rent can and will most likely rise, even if some level of rent control is in place.

So you might be paying less than your neighbor with the mortgage today, but if your neighbor’s mortgage is fixed, they’ll still be paying the same amount in the future while your rent shoots higher.

Pros Of Buying

Okay, so we’ve discussed some pros and cons of renting, but what about buying?

Well, the obvious advantage is that you actually gain home equity, or ownership in your home.

In other words, over time the home or condo actually becomes your property, as opposed to renting, where you never own anything aside from the measly contents.

Additionally, owning might be a cheaper alternative than renting these days in many markets across the United States thanks to the low interest rates on hand.

Do a simple online search and you’ll find plenty of places where it’s “better to buy than rent.”

In many cases, your mortgage payment, even when factoring in taxes and insurance, may be less than what a landlord charges for rent.

Why pay $2,500 in rent if you can make a $2,200 mortgage payment, especially if you can write off the interest and the taxes?

That’s right, with homeownership comes tax benefits. Of course, the future of the mortgage interest deduction hangs in the balance, but real estate taxes are still fully deductible.

Factor in the tax savings and your mortgage payment gets even cheaper compared to a rental payment.

An owner of property also has fewer restrictions, and can add or modify to their heart’s content, less any government bureaucracy.

This means you can make your property worth even more over the years, or simply make it more useful/attractive for you and your family.

Cons Of Buying

There are plenty of disadvantages to owning property as well. First off, you must come up with a sizable amount of money, either for down payment or to buy outright.

With rent, typically you just need the first and last month’s payment. When buying, you’ll need at least 3.5% of the purchase price in most cases (FHA loans), which can be a hefty amount in higher-priced areas of the nation.

There’s also a good chance your mortgage payment will exceed the rents in your area. This can certainly vary, but don’t be surprised if it comes at a premium.

You also have to pay real estate taxes and insurance, which don’t stop once the mortgage is paid off. You may even need to pay costly HOA dues.

Factor that all in and you could still be paying thousands each month to live “rent-free.” That doesn’t sound very free, does it?

You also become the landlord when you own. Remember that helpful handyman at your old apartment complex that fixed your leaky faucet with a smile? That’s your responsibility now Bob Vila.

Oh, and you better believe that every little thing that’s wrong with YOUR property will give you stress, each and every day.

You can’t just pack up and move along with ease. It takes time (and money) to unload a property, and you might not make out as much as you think once you factor in real estate commissions and less-than-anticipated home price gains.

Heck, your house might even lose value and you could be foreclosed on if you don’t hold up your end of the bargain.

In Summary

As you can see, there are plenty of pros and cons to buying vs. renting, and vice versa.

When you rent, you pretty much know what you’re getting into. You’re not going to make any money, but you’re not going to explicitly lose any either. And it’s mostly a hands-off type of deal.

With a home, you’re making a bit of a gamble on your future, and the future of the economy. After all, you need to put a certain amount down, and you need to ensure you keep making money so you can keep up with your mortgage payments.

You’ve also got to set aside an emergency fund so you’re able to pay for repairs if and when necessary.

But ideally, the tradeoff is that you’ll be rewarded for making that homeownership leap of faith.

Below, I’ve added a fairly exhaustive list of pros and cons for those pondering the rent vs. buy question:

Rent Advantages

• May be cheaper than a mortgage payment
• Fewer (if any) maintenance costs
• No down payment required (less deposit)
• No real estate taxes (renters insurance optional)
• Less stress (who cares, it’s not yours!)
• Freedom to move or downsize when necessary
• No risk of home price depreciation
• Some utility bills may be included
• “Free” amenities such as pool, gym, security
• Money can be used for other, more profitable investments
• Can’t be foreclosed on

Rent Disadvantages

• Rental payment may exceed monthly cost of mortgage
• No ownership or wealth creation
• Payments never stop when renting
• Rent will rise over time
• Must deal with a landlord or management company
• No tax benefits
• Rules, regulations, and limitations
• More temporary, less stability
• Always at the mercy of the property owner

Ownership Advantages

• You can build home equity and wealth
• Sizable tax deductions possible
• Your space, your rules (pets welcome)
• Ability to remodel, expand, tear down
• Pride of ownership (social status, accomplishment)
• Potentially better for children, family structure
• Mortgage can improve your credit history/score
• Ability to borrow against your home (HELOC or cash-out)
• No more monthly payments once mortgage paid off
• Fixed payments (if you choose a fixed mortgage)
• Mortgages are the cheapest loans available
• No landlord
• Can exclude capital gains when you sell (partially)
• Inflation hedge
• Can rent out to others
• Can sell and use proceeds for bigger/better home
• Retirement nest egg
• It’s the American Dream!

Ownership Disadvantages

• Home prices may lose value
• Could overpay for your property
• Obtaining a mortgage (and finding a home) is a hassle
• Not everyone qualifies for a mortgage
• You must pay taxes and homeowners insurance
• Total housing payment can be more expensive
• Mortgage payment can rise (if an ARM)
• Sizable down payment necessary
• Maintenance costs can be excessive
• Pricey HOA dues (if applicable)
• You’re “stuck” in a home (long-term commitment)
• Increased liability and responsibility
• Transactional costs of buying and selling
• Ownership is stressful!
• Taxes and insurance generally rise
• Your home can be damaged or destroyed (and not fully insured)
• Can be foreclosed on and lose your home

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Real Estate Economic update

After warnings of doom and gloom for the economy if the sequester cuts took effect, which they did, and similar warnings if Los Angeles voters rejected a 1/2 cent sales tax increase, which they did, the stock market reached an all-time high! Real estate price index showed yearly price increases of 10-14% depending on which index reported! Company profits were reported higher than expected. Results of the banking "stress test" showed that major banks were very solvent, better than expected. Unemployment dropped to 7.7%, the lowest level in 4 years! All this good news did result in some money moving from bonds (safety) to stocks, which raised rates a little. So I am reporting more of the same: low inventory, raising prices with no end in sight, and multiple offers. Prices are rising at an unprecedented pace.

Economic update (The sequester)

The big news this week was that no deal was reached to avert the sequester spending cuts. Despite warnings of "doom and gloom" the stock market closed up for the week! Obviously, investors don't  see these cuts as any real risk to the economy.  Even health care was up and defense did not see any real drops in their stock prices. These cuts are such a small percentage of the budget that I really don't see how they can have any real impact. In most cases, spending in these areas cut are pretty much rolled back a year ago levels.  The argument was that targeted cuts would have been better than across the board cuts. Unfortunately, there was no agreement on targeted cuts or limiting deductions to avoid cuts. The good news is that between these cuts, the end of year tax increase deal, the 2011 cuts, and winding down the wars the U. S. is expected to save over 4 trillion dollars over the next 10 years.  The growing economy should make tax revenues higher as well.  I would expect to see an upgrade in the United States credit rating soon. Bond yields dropped this week as well, easing interest rates! So for real estate, its more of the same. Low rates, rising prices, multiple offers and low inventory.  We are beginning to see more homes priced too high and not selling.  There is definitely a cap presenting. I think that is a sign that we will see the market normalize within a year. 

·     The 30-year mortgage rate slightly fell this week to 3.51 % from 3.56% last week, dropping near the record 3.31% low reached in November.  Last year this time, the 30-year FRM averaged 3.95%.  The 15-year rate slipped to 2.76% from  2.77% last week.  The record low is 2.63%. The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.61 percent this week with an average 0.6 point, down from last week when it averaged 2.64 percent. A year ago, the 5-year ARM averaged 2.83 percent. 1-year Treasury-indexed ARM averaged 2.64 percent this week with an average 0.4 point, down from last week when it averaged 2.65 percent. At this time last year, the 1-year ARM averaged 2.72 percent. These low rates are continuing to help the drive housing market up, while mortgage delinquencies are decreasing and home prices are steadily rising as demand surges. 

This week's economic update

The 30- year mortgage rate slightly rose this week to 3.56 % from 3.53% last week, still at the highest since September. Last year this time, the 30-year FRM averaged 3.95%.  The 15-year rate stayed the same this week at 2.77%.  A year ago at this time, the 15-year FRM averages 3.19%.  The 5-year Treasury-indexed ARM averaged 2.64 percent this week with an average 0.5 point, the same as last week. A year ago, the 5-year ARM averaged 2.80 percent. The 1-year Treasury-indexed ARM averaged 2.65 percent this week with an average 0.4 point, up from last week when it averaged 2.61 percent.  At this time last year, the 1-year ARM averaged 2.73 percent.  These low rates are continuing to help the housing market, while mortgage delinquencies are decreasing and home prices are steadily rising as demand surges. 

     

Thursday’s  agreement on the mortgage settlement reported Banks have provided $45.8 billion in aid under the mortgage settlement plan. This relief was a part of the settlement from about a year ago by 49 state attorneys general, several federal agencies and big banks. The settlement resolved investigations into allegations the financial institutions had used faulty paperwork and other unethical practices to foreclose on homes.  Most of the aid to consumers have received have been through short sales not loan modifications, especially in CA.  According to California reports, about 175,000 consumers have received a total of $20.6 billion in principal reductions, short-sale relief and  only a very small  percentage received loan modifications.

Prices, obviously, are rising faster than anyone would have expected. I don't see any end in sight. Buyers who are on the fence may soon find they may have to pay much more for a similar home! 

Major economic news this week

Today the global stock market climbed to the highest in two years, aided by an increase in manufacturing and new employment data which indicates the global economic recovery is on track.  This week Dow rose above 14,000 for the first time since October 2007.  Employment data was released today and showed what was expected-- steady but slow growth for January with 157,000 added jobs, 196,000 in December and 247,000 in November.   Job creation is steady and strong enough to bring the unemployment rate down over time — just not very quickly.  The January unemployment report was, more than anything, affirmation of that fact.

While the unemployment rate rose 0.1 percentage point to 7.9%, there are still solid gains in construction and retail employment.  The construction industry added 28,000 jobs, following a 30,000 gain in December, which is suggesting that more homes are being built and employers are increasing their construction crews.  The retail sector added 33,000 jobs and actually did pull back on hiring in anticipation of the increase in the payroll tax.

The steady growth in jobs figures explain a lot.  They explain why consumer spending and retail sales held up quite well during 2012, in spite of the seemingly weak jobs numbers.  They help explain why consumers in general did a far better job keeping up with financial obligations—from mortgages to credit cards.  They help explain why more people were willing to take a plunge on purchasing a home or buying a new car.  Buyers are starting to feel more confident, home values continue to steadily rise and there is more optimism about the economic recovery.  In end, the financial situation of 2013 is rather bright especially in consideration of the fiscal cliff deal.  But the new tax increases for 2013 that was worked into the fiscal cliff deal could still affect retail sales and other measures of economic performance in coming months.  

What does this mean to the housing market?  Very low inventory.   Prices rising quickly and multiple offers.  This was a very unusual real estate recession.  Caused by a sudden crisis in liquidity in which financing dried up overnight in late 2007.  Now that financing is back in the market we are seeing the market correct.  It won't be long before we reach the highs of 2006! Who would have thought prices would recover so quickly? And interest rates are steadily rising!

California Foreclosure Rates Drop

Mortgage Rates rise big time today

Freddie Mac reported today interest rates on fixed mortgages jumped big time, lenders are offering the 30-year home loan at 3.625%, up from  yesterday’s rate at 3.42% and 3.38% last week.  The rate for a 15-year fixed mortgage today is 2.875%,  up from yesterday’s rate at 2.71%, and  2.66% last week.

Interest rates have been near all-time record lows for months now, but with today’s rates it seems to be clear the economy its gaining momentum and the determining factors of an increase or decrease in rates point to economic uncertainty.  In the coming months, we will be able to see if the economy is picking up steam or not as the government deals with fiscal cliffs, debt ceilings and increased tax rates.  Until stable economic certainty is reached, rates will continue to fluctuate week to week.  

 As we progress into 2013, the number of foreclosures in California continues to decline pointing to signs the economy is improving.  Home values will continue to increase at a steady rate which means fewer homes are underwater.  The decline in foreclosures in California is boasting home values and has contributed to the overall progress of the housing market recovery.  Banks have turned to short sales and other kinds of loan plans for the borrowers who cannot make their mortgage payments.  The percentage of notices of default and trustees deeds filed on California properties has also declined dramatically in 2012 and continues in 2013.  Currently, notices of default in California have dropped to the lowest levels since the 4^th quarter of 2006.  Nationwide, the percentage of foreclosures have also dropped however, the percentage of buyers behind their payments have slightly increased.

This week will be packed with major economic news. The biggest story will be Wednesday's Fed meeting, as investors watch for hints about the duration of the Fed's bond-buying program.  The biggest economic report next week will be the important Employment data on Friday. As usual, this data on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.  Before the employment data, Durable Orders and Pending Home Sales will be released on Monday.  Fourth quarter GDP will come out on Wednesday.  Personal Income, Core PCE inflation, and Chicago PMI will be released on Thursday.  ISM Manufacturing and Construction Spending are scheduled for Friday.  In addition, there will be Treasury auctions on Monday, Tuesday, and Wednesday.

Mortgage rates fall to near record lows this week

Today, mortgage rates fall once again to  near record lows again. A 30-year mortgage rate this week has dropped to 3.38% compared to 3.4% last week.  This week’s rate is slightly above the record low that was reached in November at 3.31%, which marked the lowest rate on record dating back to 1971. A 15-year mortgage remained unchanged this week at 2.65%. The record low for a 15-year mortgage is 2.63%. With rates so low at this time, any bit of inflation can push them higher.

Last month, the Fed said they would keep interest rates near zero until the jobless rate falls to 6.5 percent and as long as the central bank believes inflation will stay below 2.5 percent. At this point, inflation remains flat. Labor Department reported on Wednesday, CPI was unchanged last month thus with this new data, inflation will continue to remain flat and not hit the Feds threshold to raise interest rates.

Construction rates have also increased as builders began to build 780,000 homes just last year -- up 28.1% from 2011, when new home construction hit a record low, the lowest since 2008. Although, increases in construction became a part of the housing recovery last year, it hasn’t made a significant contribution to the hiring. With these reports, increased construction rates have made investors more optimistic about the US economy.

With the unemployment rate projected to fall lower this year and home sales expected to rise at a rate similar to last year's, interest rates are projected to remain relatively low throughout 2013. Assuming the uncertainty of the fiscal policy, debates during the first quarter fails to disrupt the economic expansion and the U.S. should see about two million new jobs created this year.

We are most definitely amidst a period of financial uncertainty as the government deals with fiscal cliffs, debt ceilings and increased tax rates, these uncertainties have caused rates to fluctuate over the past several weeks. Banks are increasing mortgage lending in Southern California, so this is an excellent time for buyers.  These lower mortgage rates will help strengthen the housing market and road to recovery and we will start to see inventory levels rise.