Ok, first of all, what I'm about to say here regarding why owning a home is better than renting, is my opinion whether you agree or disagree. No offense to the renters out there.
If it weren't for the recent run-up in housing prices, I would tend to agree with much of what you say.
Let's say you rent an apartment for $1,500 per month for 30 years. $1,500 X 30 Years = $540,000. That's only an estimate, and let's not forget that rent goes up every year.
That's true. Keep in mind that rents are controlled by market forces. Rents can only go up as to how much the market can willingly bear. If the market demands $1,000/mo. rents, then that's what the units will rent for. In fact, in the Bay Area (Northern California), rents actually went
down.
On the other hand, if you buy a home that's worth, let's say, $200,000. Your mortgage payment, including taxes and maintenance, is likely to be around $1,500 per month. If this is a "fixed" mortgage, your monthly payment will not go up over the years the way rent would. The only thing that goes up is the value of your house.
This is in no way a 'fixed' mortgage. Taxes do go up every year, and if you're lucky (or unlucky, depending on year of purchase), Proposition 13 (California) or SOH (In Florida) actually cap tax increases year after year. If you're living in a state, say, Maryland, that regularly assess property every year or other year, then you might as well as be toast.
And then there's the other required payment; Insurance. Unfortunately, Florida homeowners have been beset with
huge insurance premium increases, to the point where they feel they are being 'priced' out of living in their own homes.
The only solution I see is for home prices to decrease, forcing insurance rates to decrease as well. Again, market forces are at play here.
Lastly, if you live in a HOA, then there's an additional fee, and yes, they can go up, socking special assessments to pay for emergency repairs, curing insurance shortfalls, etc. Obviously, it's better to live in a regular neighborhood and not in a condo with the HOA alligator chomping your wallet every month.
BTW, if a person assumed a mortgage of $200K at 5% interest rate, the P&I payment would be $1,073/month. 6%, $1,200/month. 7%, $1,330/month. Tack on taxes/insurance, and the monthly bill could be higher than $1,500/month figure you've given. I know you probably made an educated guess, and $1,500 does sound allright if taxes/insurance were kept to their bare minimum.
Ok, so let's say the value of your house goes up 6% a year (the national average is a little higher). After 30 years, your house will be worth around $560,000.
Despite the recent softening in the residential housing market, this trend does appear to be possible. Due to the high costs in procuring a mortgage and purchasing a home, it is always desirable to view it as a place to live in for a long time, and not as a short-term investment, so 30 years sounds very nice!
If you were to sell your house in 30 years, you will pocket more than $360,000 after paying back the money you owe the bank ($560,000 - $200,000 = $360,000). If you rent, you will pocket $0.00 and only have paid your Landlord's mortgage payments ($540k). Makes sense?
Let's say one pays off the mortgage in 30 years w/ payments of roughly $1,500/month. By the end of 30 years, the homeowner has paid $540,000, and upon selling the home for $560,000, has only garnered a measly profit of $20k. Yes, the interest payments are subsidized to an extent by the govt., so the profit is actually bigger than 20k. And yes, I know the homeowner only paid $200,000 originally, and the 'paper' profit is $360K. So, there's a profit potential of anywhere between $20k to $100k in this scenario.
But, what's even better if this homeowner
continues to live in the same home, after paying off the mortgage. That's where the homeowner now realizes the true savings of owning a home to live in, only paying taxes and insurance. This should be the true goal of homeownership, and any profit potential, while very nice, should be secondary. Under this scenario, this homeowner will win easily against renters renting a place for 30+ years.
However, at least in New Jersey, the interest is tax deductible meaning that the government is giving you a tax break, and you can deduct from your taxable income the interest charges you pay to the bank. As a renter, you do not get this kind of tax break!
In California, renters do get this kind of tax break. (I know this, because I took advantage of it!) Granted, this tax break is very small, around $100 dollars or so.
Anyway, this is what I've gathered so far. I understand being a homeowner / investing in real estate isn't for everyone, but I wanted to share with you why I think real estate is a good long-term bet.
Substitute 'investing' with 'owning', and truer words have never been spoken. This latest housing mania has been fed by investor speculation, and as a result, underlying fundamentals that have promoted home ownership have been swept away.
I, for one, will continue to be a renter until the housing market fundamentals have found their way back and return to normal levels. Right now, the financial analysis in purchasing a home do not make sense when rents are factored in the equation.
Strangely enough, in Rochester, NY, where many Deaf people live, many homes are actually quite affordable there. Buying a home in Rochester, NY actually may make better financial sense than renting. (What is the prevailing rate of rents in Rochester, NY, BTW?) Too bad I can't say the same about the metropolitian DC area; That area is simply too expensive, and I don't forsee any relief soon through normal market forces pushing their way into the housing market there.
Alex- Thanks for starting such a debate. I continue to be fascinated by the macroeconomics of housing ownership and that of credit underlying our U.S. economy.
@ Alex, I agree that owning a house is a lot cheaper than renting either a house or an apartment/condo etc...
