On Renting, Part 2: Our Future
Posted on January 29, 2008 by Him and tagged future, housing
Hey, you'll need to read the previous post to figure out what's going on here!
Yes, we're strongly in favor of moving away from Chicago in 2 years. I love Chicago, but I've been here all my life. I want to experience something else to see what else is out there.
With that in mind, buying property right now doesn't seem to be in our favor. Not taking any market conditions into consideration, let's assume that we purchase a $250,000 home with a $30,000 down payment (the amount we have in cash savings now) and a 30-year fixed mortgage at 5.5%. In 2 years when we want to move we would pay down $6,094.47 in principal; therefore we would have $36,094.47 in equity. None of that includes any maintenance, closing costs, or other stuff like new furniture. Therefore, if we sold our home at the price that we paid for it, we would have some money to put down on another home and cover any costs.
But, if we take current market conditions and some pessimistic future predictions into account, the situation looks worse. Everyone and their mom is predicting that home prices will go down in the next few years; some are even predicting up to a 30% decrease in value. Assuming the above calculation, that would introduce the very real possibility that we would be upside-down on our mortgage, or we would owe more than what our house would be worth. Therefore, if we wanted to sell our place in 2 years, we could actually LOSE money just on the price of the house, not to mention have to spend more to purchase an entirely new place. That of course, assumes that we can sell our place right away; a quick look at the Chicago MLS listings (is that redundant like ATM machine?) for condos in that price range in our neighborhood reveals a glut of properties that have been on the market for more than 3 months. There's no way I would move unless the old place was sold; I wouldn't want to pay 2 mortgages for any period of time.
Now I know what people are saying: I can't time the market. I know that. But is waiting 2 more years to buy property really that bad? I believe that money that is currently going towards housing is not going to waste; after all, we do have to live somewhere. The alternative is to not spend any money on housing and live on the street, right?
As for the argument that we're making our landlord rich - even with a mortgage, aren't we going to make someone rich? The lender? The builder? The person who we bought the home from? It's not like I'm hacking away at trees, forging my own tools, and making a home from scratch. Money is changing hands - the mortgage process simply abstracts who is receiving it.
In the end, we're not against buying a home. We're just not going to purchase a home right now. We're renting now because it gives us the short-term flexibility that we need for our future plans. We also want to wait a few years so that we do it right. What's wrong with that?
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Sounds like a wise plan to keep saving until your next move rather than jumping into condo-ownership right now. If you invest your 30k in savings over the next two years you should be able to make about the same as you would have through equity in the house, and with far less risk considering the current housing market.
I think you're making a very wise decision. I like the five-year rule much better than the two-year rule I've heard too often. I bought my house during the boom and sold it this past summer (owned for four years). I was lucky to come out about even (not counting maintenance costs). I would never buy a house again unless I was going to stay in it for AT LEAST 5 years.
pharmboy | Jan 29, 2008
your post makes absolute sense.
however, my new wife and I broke that rule just last month and bought a house even though we don't plan on being here more than 3 years. Our caveat? Houses are so dirt cheap (80K) in rural oklahoma and we've got great incomes to pay the mortgage off in 12 months.
it was a lifestyle/entertainment decision for us.
but when we move back towards the mrs.'s home (chicagoland) we'll be crunching some much bigger numbers I'm sure
Marie | Jan 29, 2008
We are getting a bunch of crap from a lot of people because we don't want to buy a home right away. We have 50K in student loans and my husband has never worked full-time in his field. We want to make sure that he likes his job first before we force him to keep it. Plus what are people thinking that in three days we can determine what is a good part of town to live in and what is a reasonable price to pay? I find that people mentally forget repairs, taxes, and higher utility payments when they try to convince you you are losing so much money by not owning a home. Oh and lets calculate how much you can save on the financing by having a higher down payment, not to mention one is almost required anymore.
MVP | Jan 29, 2008
There's absolutely nothing wrong with you guys renting. Home ownership is a huge commitment, even if it's only a condo. Plan on spending many of your weekends making upgrades, maintaining the landscaping or making repairs. If you're renting, you just call the landlord if your fridge breaks down or your floor rots.
MLND - I agree with you. Even if the real estate market was better, it doesn't make sense to buy when you know that you're going to move in 2 years. Markets go up and down - once you both have settled where you plan to stay for a while, then you'll make your decision. Keep renting, keep your flexibility, and live your life your way.
Mark | Jan 29, 2008
At the risk of making this comment thread sound like an echo chamber I agree as well. But there is also the issue of the rent/buy price ratio.
I live in a city where the housing market is only just starting its downturn. A few months ago I looked at condos that were similar to my current apartment. I ran the numbers and figured out that my monthly payment would be 250% of my current rent payment. It would take a long time for me to be spending less on INTEREST than I am currently spending on total rent. Until the market comes back down here I'm going to be a renter and put the difference into savings.
Chief Family Officer | Jan 29, 2008
Just repeating what everyone else has said, I think you’re smart to wait. Two years is not a long time when it comes to investing, and buying and selling a home can be stressful. Besides, Millionaire Mommy Next Door has convinced me that renting can be a good move financially :) There are times when buying a home is a good move (and in our case, it was - our expenses are hundreds less than rent would be) but there are times when it is not (like when you’re planning on moving soon, as you are). One thing I would really try to do now, while you’re waiting though, is build up a down payment for when you do buy a house.
A lot of people are getting sucked into home ownership because of low rates and a buyer's market. Better to wait until you are ready, not when the market's ready. I wonder if just as many people will over-buy houses now as did when the real estate market was booming.
Joel | Feb 1, 2008
I agree that if you are planning on moving in two years you should hold off on buying and invest the $30K elsewhere. The only thing I dont understand is why you wouldn't calculate closing costs in the equation? If you take into account closing costs (appraisal, title, taxes, & commissions) for both the buy and sell, then it becomes very clear what you should do. Figure 1.5% of the purchase price for closing costs ($3,750), and 1% for closing costs on the sale side ($2,500) + 6% commission (15,000). Now, your two year, $30,000 investment is reduced to $14,844.47. This went from a maybe move to a no-brainer.
eden | Jan 29, 2008
Good choice. Most of the advice I've seen cautions people from buying a house if you're not planning to live there for at least five years - even during the 'boom'.
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