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the buying/renting debate

WonderK

I've been having this debate in my head and I have no idea why I haven't brought it up here sooner.

I'm at this weird crossroads in my life. I'm a 27-year-old SWF, motivated, make decent money, and I love using power tools. All of these things point to "Buy a place and fix it up". However, whenever I look at places to buy, they are just out of my price range.....i.e., the mortgage would be too much for me on my own. And I'm so picky that I won't really even seriously consider something out of a certain neighborhood. Besides the fact that I don't really feel like doing it all on my own....I don't even know that I could or that I have the self-confidence.....I'd just like a buddy to help me.

So then I kind of wimp out and stick to the current rental situation. I'm like, "well I'm going to grad school in 18 months anyway, what's the use"....it just seems like a huge ordeal to buy and I feel like I would have some help but no one that I can truly count on. And I guess that's kind of scary.

So, am I lazy, or what? Or am I normal? Anyone have any suggestions or tips? Or want to fix up a place with me? :o)

 
Mar 18, 06 2:26 pm
timpdx

I'm a working artist and no way I can afford to buy in SoCal, anywhere. I'll probably have to move in order to buy a place. I will also buy a fixer and am handy with tools, but then I see how long it is taking people I know to actually fix their homes, 5 years, 9 years and so on. The time and $$ of doing so is pretty daunting.

Mar 18, 06 2:29 pm  · 
 · 
broccolijet

WonderK -- Having gone through this decision process, I can empathize with your situation...it's never an easy decision and it's so dependent on an individual's circumstances and future plans that it's hard to give useful advice. But I'll try anyway...

Since you're planning on heading to grad school in 18 months, you don't seem like you're in a good place to take on a mortgage on your own, especially one in a selective neighborhood where you might be extending yourself. You're probably familiar with the term 'house poor', but if not, it's where you commit so much of your budget (and time in the case of a fixer-upper) that you have no money to do anything else and all your spare time is spent working on your house. Not an easy (or fun) place to be and from your post, that doesn't sound like something that interests you (especially with school on the horizon).

Buying your first home IS a big deal, mainly because you're learning as you go. You're not lazy...you sound pragmatic and realistic...yet a little too hard on yourself! ;)

If the idea of throwing away money to a rental is too painful to bear perhaps you know a few reliable (and stable) friends who are in your situation and might consider going in on a house together as joint owners? In areas where the housing market is strong, this can be a great short-term investment over the course of a few years. Of course you and your potential housemates will have to outline a partnership agreement to define how you'll get into and out of the arrangement, but that's workable.

There is a lot more to this than can fit here, but from the tenor of your post, I would recommend you stick with the rental situation for the near-term unless a great opportunity arises to go in with someone. I don't know what your financial situation will be while you're in school, but I certainly doubt it'll be easier to maintain a mortgage without the income you're currently getting. You've got time...I didn't buy until I was 31.

Just some thoughts...good luck!

Mar 18, 06 3:14 pm  · 
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spiderdad

wonderK - ive been looking into buying for some time; but ive decided against it. i think there is a good argument that suggests that there is a houseprice bubble - it hasn't (and probably won't) burst as the Economist has been shouting about... but are you wasting money by rent? not necessarily. for me personally, ive realised that even if house prices keep a fairly steady rise my money is still better off being in a bank... see below.

here's a good and recent article on house prices - make sure you read it!



Soft isn't safe: Homebuyers can lose money even if house prices do not fall

THERE have been a lot of moves up and down The Economist's global house-price league in the past couple of years. In 2003 Australia and Britain topped the table with 12-month rises of around 20%. But prices there have since levelled off and in the past year have broadly kept pace with inflation (see table). Hong Kong has also tumbled down the league: after a 30% jump in 2004, prices have risen by only 5.8% in the past 12 months and since last summer have even fallen. In the past year house-price inflation has also fallen by more than half in South Africa and China, and slowed from 17% to 13% in Spain. The new high flyer is Denmark, where prices are 17.7% higher than a year ago, followed closely by New Zealand (16.8%).

America's boom also remains strong, with prices up by 13% in the year to the fourth quarter. But there are signs that the market is cooling. Sales of existing homes fell for a fifth month in January, to the lowest for nearly two years, Stocks of unsold homes rose to 5.3 months' supply (from 3.7 a year ago), the most since 1998.

Ian Morris, an economist with HSBC bank, calculates that about half of America's housing market is experiencing a bubble, with prices overvalued by almost 40% even after taking account of low interest rates. Homes in California and Washington, DC, are overvalued by 50%.

That house prices in Britain and Australia have flattened rather than slumped has encouraged most commentators to expect a soft landing in America too. However, that could still mean a hard bump for the economy and for many homeowners.


As British property prices have levelled off, the annual growth rate of retail sales has plunged from 7% to 1%. Mr Morris calculates that even a perfect soft landing in America, with flat house prices across the country, could cause home sales to drop by 30-40%. In turn, mortgage equity withdrawal, which has been financing much consumer spending, would then dry up, creating a drag on growth equivalent to more than 3% of GDP.

British homeowners may comfort themselves that, contrary to The Economist's predictions, prices have not fallen. With homes still remarkably dear, prices could yet fall. Next worst, they could stagnate for a long time. And even then, housing investors could lose because transaction costs such as estate agents' and solicitors' fees and stamp duty are so high.

Suppose you bought a flat in London for £500,000 ($870,000) and sold it five years later for the same amount. You might think you've got your money back; in fact, you have lost a tidy sum. Suppose that you put down a deposit of £50,000 and took out an interest-only mortgage. Stamp duty, legal fees and other costs on the purchase were almost £20,000; five years' maintenance cost £10,000. Your selling costs were then, say, £15,000. Of your £50,000 deposit, you now have £5,000—a 90% loss. Had you simply put the cash in the bank, you would have made 20%.

Worse, because rental yields are so low, you have paid more in interest over the five years than you would have done in rent. In most other countries, where transaction costs are typically twice as large as in Britain, the loss could be bigger still. Investors be warned: even if prices do not fall, housing is not, so to speak, as safe as houses.

Mar 18, 06 3:39 pm  · 
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GT+...:(

There is a glut of housing in a lot of markets in the United States and we keep waiting for the bubble to burst but I don't think that is a reason to shy away from buying, at least if you in it for a relatively long term. You have to take your time and find a good deal but the sooner you buy in your life the better imo. You get some tax breaks and you're not throwing every penny away to live. That being said, with your circumstance you probably shouldn't buy. I am starting graduate school in the fall and have been working full-time for two-years since undergrad. I have a twin sister who bought a brand new condo about 6 months ago. I could have easily bought one but I knew I was going back to school. The only way it would have worked is if my mom would somehow take care of renting out the place while I was away. She could have paid half of the condo and made it an investment. In the end nothing happened but I think your parents helping you out early so you can get in the market is something to look at if you're still pretty young. If your thirty it may not work as well. But the sooner you get in the market the better and if it can earn some extra income for your parents as the close in on retirement than it could be a win win situation. All I know is I plan on buying immediately out of graduate school.

Mar 18, 06 9:20 pm  · 
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trace™

Ca and Fl's bubbles will burst fairly soon and a lot of people are going to be hurt really bad. Wait for it (you've got time if you are entering grad school), buy some poor sap's foreclosure. May have to wait a while, may be next month, but you will save tons of money eitherway.

Other places look like the markets will slow but remain solid. Anywhere else and I'd agree with GT+ - it's better to own and pay a little more, in the long run (I just bought a new place), but if in CA things have just gotten so out of control that when it crashes, it'll kill.

Mar 19, 06 8:44 am  · 
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spiderdad

can someone please explain what happens to our (architects) job prospects if there were to be house price crash...? even if this happens locally.

does this generally result a sudden slowdown of work, and thus a lot of people out of job?

Mar 19, 06 8:54 am  · 
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bowling_ball

Buy a house, and rent out a room (or basement or top floor, etc).

That'll help with the mortgage payments, at least. And if you're lucky, you'll have someone to help you out around the house when you need an extra hand.

Mar 19, 06 10:55 am  · 
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WonderK

Thanks you guys for the thoughtful responses. You've pretty much nailed my thought process on the head. I've been paying attention to the debate about the housing bubble as well, and there was an article several months back about which markets were over-valued and by how much.
You can read it here.

I am in Cincinnati and note that the market here is actually slightly undervalued. But again there's the whole "i'm leaving" thing too, and for that reason you are probably right, I should probably stick to rental for right now.

I really need to get out of my apartment though. I'm just tired of it. Of course, then it's a huge pain to move. Who here doesn't have a lot of crap, right?

Actually last night I had a dream about what I'm supposed to do! Although it involved my mom getting an apartment with my cousin and then about 10 transactions so perhaps I should ignore it, lol.

Mar 19, 06 11:34 am  · 
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whistler

I say go buy the house and get some Grad School Mates for roomies.

Mar 20, 06 12:38 am  · 
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sameolddoctor

whistler, that is a good idea...

Mar 20, 06 2:43 am  · 
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myriam

I've been thinking about this one too because if I act before the next tax season I can get government assistance on a house purchase (I qualify as low-income! yay, the life of an architect!). The problem is that I want to leave the Boston area within the next year, so why saddle myself with a house only to leave and end up an absentee landlord with a remote house on my hands? BUT if I wait, I lose the help, and frankly I doubt I'll ever be able to afford a house otherwise. Also I am kind of pretty sure that I won't be in a place I want to sink roots into for around another 10 years, probably.

So, it's been interesting reading the responses in here.

Mar 20, 06 9:07 am  · 
 · 
A

WonderK - I've know how you feel. For years I've been moving around and right now I'm just ready to settle down into my own home. Of course I want a fixer-upper and am particular about neighborhood. Then when I look at prices I cannot imagine spending $300k or more for something that needs a complete facelift on the inside and out. To the dissapointment of some realtor friends I've decided to rent a condo downtown for at least another year. My reasons for doing so...

1. Prices are flat, at least here in Minneapolis. After years of huge inflation, second only to Chicago in the midwest, the prices aren't going up for once. Waiting isn't going to "cost" me. I've heard prices in New England and California are actually going down in some areas.

2. Defaults are up nationwide already. Since interest rates have been on the rise for the past two years and so many people are financed on variable rate ARM mortgages more and more houses will go into default once they can't afford the houses they're already over-extended on. This WILL cause a price fall.

3. Watch the Fed as it's been suggested to eliminate the mortgage interest deduction. Right now we are living in historically low tax times. Many Wall Street analyists believe that after the 2008 election taxes will rise and the mortgage deduction will dissappear. As much as 10% or more of a homes value is built-into this deduction to "help" the housing economy.

I could go on but for these and several other reasons I think you'd be best off to rent for another year or two. Too many people think of housing as an investment. It's only an investment if you rent it out and make an income off it. Also remember that it costs a lot more to own than rent. You've got more bills, real estate tax, maintenance costs, insurance, etc. Given the indicators wait a year and come in and sweep up the leftovers after the hype dies off.

Mar 20, 06 9:10 am  · 
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BOTS

32 and still renting in the UK. Most of Europe rents.

Mar 20, 06 9:11 am  · 
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A

Hmm, I see that today Kunstler has something about the real estate market.

Mar 20, 06 9:20 am  · 
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4arch

I just bought a small house and although it's a stretch for me, I feel like it will be worth it in the long run. It's in a neighborhood that's affordable yet still relatively "hot". There's just something very gratifying about finally having a place of my own. it's nice to be able to change things and know that those changes will most likely add value to the house rather than getting me in trouble. It's a great feeling to not have to be at the whim of the floorplan, materials, and finishes chosen by a landlord.

Some words of advice:

As far as doing your own work on a house, I think being in my mid 20's was (except for the issue of not having a lot of money to throw around) the perfect time to do it. I know I won't want to take on anything like this once I'm raising kids and I may not have the energy to do it once I'm retired.

Contractors can smell a first time buyer from a mile away and will try to rip you off, especially if you go into a neighborhood where a lot of other rehabbing is going on. The materials for one plumbing project I did were only about 15% of the total amount of the estimate one plumber gave me for the same job. Even having good contacts through work didn't help me there.

Working on my own house has taught me a lot about how a house goes together and given me a sense of ownership I wouldn't have felt if the house had been in move-in condition. Your confidence grows dramatically once you take the first leap beyond the point of no return. In my case it was sledgehammering the tile walls around the tub down. Once that was done I knew I HAD to rebuild.

Mar 20, 06 9:26 am  · 
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Ms Beary
100 s.f. house, anyone?
Mar 20, 06 9:31 am  · 
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mm

I once read that there are three things in life one is never really prepared to do but should do anyway:

a. Get married.
b. Buy first house.
c. Have kids.

(not necessarily in that order)

I generally agree with that. Though I haven't done b or c, I do know that I'm often the type of person that spends so much time worrying that everything needs to be just perfect in order to make a big life change. But the thing is, there's never a perfect time. Whenever I make slightly more money, I still think life would be better if I made just a little more. The "right time" to buy a house (or get married or have kids or make any life-changing decision) is whenever you can get up the courage to actually do so.

Mar 20, 06 9:57 am  · 
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4arch

I never thought I'd be buying my first house without being married first but I didn't see any reason to tie "b" to "a" when I don't have much control over when "a" is going to happen.

For all the concerns people have raised about buying, I haven't met anyone who ever regretted owning a house. I think you just have to be prepared to ride out the hardships, and you can't go in with too rigid of an idea of how long you want to own the place or how much money you want to take away from it when you sell.

Mar 20, 06 10:10 am  · 
 · 
A

bryan - I know people who have regretted buying a house. It's called unforseen circumstances. A job loss, divorce, or corporate relocation can quickly change those "long term" plans into "motivated seller." I personally have met several people who have lost tens of thousands because they bought rather than rented for a few years. Even if you sell the house for what you paid all the realtor fees and closing costs put you in the red. Many people in the older generation were drastically hit with the huge interest rates of the late 1970's to early 80's. It's next to impossible to sell when rates are 20%.

Sure, if you are constantly waiting around for the "perfect" time it will never find you. Then again, you can wait around for a "better" time. Not saying anyone who buys today or has recently bought did the wrong thing. Just given the situation WonderK brought up originally, I don't see it being in her best interests to own, as it isn't in my best interest either.

One thing to realize is that once you buy a house you are really tied to a community. It's not that easy to sell a house and leave. What scares me more than paying an inflated price is being stuck somewhere. In the past if I wasn't happy with where I was going in my career I up and moved once my lease was up. Found a better paying job in a more prosperous city. What keeps me up at night is questioning where I really want to put down roots for what could be a long time.

Mar 20, 06 10:54 am  · 
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liberty bell

WonderK, given that you are headed to grad school I would think buying is not a wise choice. Unless there is a really hot condo market in your city and you know you would be able to flip a condo in 12 months - which I very much doubt is the case. Oh wait, is that Ascent building going to have condos?! I kid.

As A said you are really tied to a place once you buy there. It may be that you move to a new city for grad school, fall in love with it and think you could stay after you graduate, and decide to buy a house there. I have friends who bought during grad school because housing in Philly at that time was so cheap it basically cost the same as renting. Then they slowly worked on the house and sold it after graduating, or stayed where they were after finding a job.

As for the whole remodeling thing, I can't emphasize enough how buying a house and doing major renovations yourself totally takes over your life! Every weekend you're thinking about demolition and getting to Home Depot before the crowds, every evening when you come home from work and all you want to do is have a beer and put up your feet you can't because the tile backsplash is staring at you begging to be grouted, every single object and even the vertical surfaces in the house are covered with dust and you have to pick through the power tools to find your toothbrush...it sounds romantic but doing the work yourself means it takes a long time and living in that scattered construction state for five years is no party!

Of course I think every architect should buy and renovate their own home but it's not a small undertaking and if possible: hire a good contractor to do the bulk of the work for you.

Mar 20, 06 11:14 am  · 
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brian buchalski

first of all, there is nothing wrong and/or embarrassing about renting. it's a perfectly good strategy for short term living arrangements.

secondly, and i'm going to draw from days as a financial advisor here, unless you intend to stay in the house for a minimum of five years, then i wouldn't suggest buying. as an investment professional we considered real estate as rather risky in terms of asset allocation. it is cyclical and very illiquid. many people have been seriously burned in real estate deals.

admittedly the recent history of the housing market has led many people to believe that they can make some quick money by flipping houses in the short-term, but this is an abnormal cricumstance and anecdotal evidence already implies that this may be ending. traditionally speaking, if you owned a home for less than five years you risked not gaining enough appreciation in value to account for the expense of relocating (and that's assuming the property appreciates in value to begin with).

the idea of buying a property and renting is also tempting but keep in mind that (and there is some geographical variation here) although price of property has escalated considerably in recent years, rental rates have been relatively stagnant over the same time frame.

moreover, there are many intangibles to home ownership that can be expensive in both time & money (not desirable for the typical grad student). you'd be on the hook for property taxes, all of the heating & utilities costs, and house maintenace.

all in all, it's a pretty good time to rent.

Mar 20, 06 11:21 am  · 
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brian buchalski

also, that article that spiderdad posted above does an excellent job of illustrating the 5 year rule for homeownership. keep in mind that much of the housing boom has been fuelled by the relative collapse of the stock market near the turn of the century. stocks have been relatively stagnant the last 5-6 years as many people have pushed their extra money or investment dollars towards real estate. it's now appearing that real estate is cooling off and i wouldn't be surprised if stock markets made a minor resurgance of the next couple of years. the rules for making money are still pretty simple, buy low, sell high.

Mar 20, 06 11:30 am  · 
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WonderK


Wow. I've read through all the posts and there are certainly a lot of factors involved. I had a vague idea of most of them, but given what I am seeing right now in my own limited apartment hunting, I'd say puddles is right.....it is a pretty good time to rent. It seems to be a renter's market where I'm at, definitely.

And I'm going to stick with the apartment hunting but there are a couple of things I wanted to mention:

A) The URGE. Taking a walk down my street, in a beautiful old neighborhood with amazing historical architecture, seeing a building, and wanting to rescue it. I did this on Saturday and I saw a building, for sale mind you, that I just wanted to start cleaning and painting on the spot. Please tell me I'm not the only one that does this on occasion.

B) .....Speaking of me being weird, I have a knack for getting myself into difficult situations and then trying to deal with it. It's my strange experimental approach to life. I.e., buying a building that I don't have time to fix up and then doing it anyway. However, I know better this time and will resist.

I heard from someone a while ago that "buying a building is the way to put yourself through grad school". I'm trying to figure out how this would be the case.....do I buy a duplex when I get there and then rent out to a tenant, or what? What would be the ideal scenario for this?

Also, to those of you who have had success buying and fixing up a building, what area of the country (world) are you in?


Again, thanks for all the thoughtful responses. Gosh you guys are smart.

Mar 20, 06 1:21 pm  · 
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4arch

As architects I think there would be something wrong with us if we didn't have the urge.

I wish landlords were more amenable to people making changes to their properties. For a long time I tried to find a landlord who'd let me live in and fix up their apartment or house in exchange for reduced rent. I had absolutely no luck but if I had found that arrangement I'd probably still be renting.

Mar 20, 06 2:30 pm  · 
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whistler

mm ... I totally agree with you on your list but as an older guy I would also add buying that first computer... ( trying to get it perfect the first time is impossible ) now I buy new ones all the time as required for the office.

I woold strongly recommend that all architects do some construction, and even better when they work on their own home. It teaches you to be humble around good builders when you realize what it takes to do good work.

I experimented with a couple home renos while living in the house and working it was hard and all consumming but learned a ton and a ton about myself too. Finally at a point in life when I can hire a good contractor for my next house scheduled to start next month. I wanted to do more myself but I finally know that I am good at designing and planning and leave the construction to the experts. I know the project will be better without me doing the finishing.

Mar 20, 06 3:04 pm  · 
 · 
A

Bryan - put yourself in the landlords shoes. Would you want some renter of yours "fixing" up the place when they have no contractors license? Unless you are personal friends with the landlord it just isn't going to happen in todays world.

I do have that urge though. Contantly I have the urge to do something productive with my time. I'm not the type of person that can sit around on a weekend and stare at the television, and exercise can only keep me busy for so long. I'm probably the only person in my apartment building with a double-bevel compound miter box saw in the closet. It's waiting for me to buy, although it is rather unfortunate I can't add some crown molding to the bedroom.

Mar 20, 06 3:07 pm  · 
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brian buchalski

wonderk,

i definitely understand what you mean by "the URGE." i see things all the time that i want improve (especially the painting part since i grew up working for the family painting business during summers). this is probably somewhat natural for architects.

also, since i'm a couple years older than you, i think that maybe there is a "late twenties desire" to settle down a little bit. (is there an antonym for wanderlust?) by that time, most of us as architects have moved several times, worked multiple jobs and still aren't terribly well paid and beginning to feel that maybe it wouldn't be a bad idea to start establishing something more permanent. personally, it literally felt like, at times at least, that i hadn't really progressed at all beyond the age of 21. especially when friends with careers outside of architecture are making more money, own homes, have families, starting businesses, etc.

still, unless you are absolutely committed to staying where you are for the long haul, i'd recommend avoiding the home purchase. you'll spend a lot of time working on projects for grad school. find the least expensive apartment near campus that you can and use any extra money for travel (rather than fixing your boiler when it suddenly craps out in mid-november). keep in mind, that grad school can be a transformative experience. personally, i found that much of my thinking was altered during those two years so it'd be a shame if you locked yourself into something before going through that. buckle down for another 2-3 years, think hard about where you want to live/practice and then buy into that community. voila! you're set, it's just a matter of patience.

Mar 20, 06 3:38 pm  · 
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