The theory with homeownership is that you should be paying approximately the same for a 30 year mortgage (monthly) as you would to rent the equivalent place. In this situation, even without significant appreciation, you should come out "ahead" with owning. Additionally, the payment stays the same and after 30 years goes (for the most part) away. There are some locations where you actually pay much less to own than to rent--- it's a GREAT idea to buy there. There are some places where it is MUCH more expensive to own than to rent--- it's a HORRIBLE idea to buy there and that is where bubbles greatly expand. Eventually enough people are priced out of the market that the bubble "pops" and housing prices readjust. I was recently looking at some home prices in the Palo Alto area--- there were places that would cost, literally, three times as much to buy as to rent. You are betting on HUGE appreciation in those places and it's just not a risk I would take.
I feel buying our home when we did (2001) in the area we did is a good example of how home ownership is supposed to work.
I looked on zillow for recently sold homes and homes for rent in my neighborhood. I found two that are the same age, same size, same builder, etc... One was recently sold and one is for rent. They are both approximately 9 years old.
Price in 2001: $344K
Price in 2010 (sold): $469K
Current rent: $2350
Assume a 30 year mortgage at 5%. $4K property taxes yearly, another $600/year for homeowners insurance and you have a total cost of:
$143K + $36K + $5K
Meanwhile, another family rents. Rent has actually gone down in this area, so I will use the $2350 cost for every month for the entire nine years.
12 months * 9 years * $2350
So, in this case, it's clearly WAY better to have owned. At the end of the 9 years, the owner sells the home:
Selling price - pay off mortgage - commission to realtor
$469K - $288K (amount still owed based on 30 year mortgage) - $28K
So, in this case, the owners not only paid $70K less over the course of the 9 years, but they also come out of the situation with $153K to put down on their next home.
Originally Posted by ollyoxenfree
Australian real estate is crazy though and I think you have to be careful comparing Australian and North American situations. Despite its huge landmass, the vast bush and desert, Australia is one of the most urbanized countries in the world. 90% of Australians are city dwellers. Over 50% of Australians live in just 4 cities - Sydney, Melbourne, Perth and Brisbane, and I think if you take into consideration the greater urban regions of these cities, it's something closer to 75%. It places enormous pressures on housing demand and real estate prices are accordingly astronomical. Yet if you compare Australian wages to North American wages, there isn't an astronomical difference.
How do rents in Australia compare to costs of home ownership *in Australia*, though?
Originally Posted by beansmama
You know, one thing I never really thought of, and admittedly, I didn't read all the responses, so someone might've brought it up (if so, sorry!).
Sure, homes increase in value (assuming it's a "real" home, not a manufactured/trailer)...but...do they REALLY?
The OP mentioned interest. If you take out a typical loan for 30 years and end up paying twice as much (or more!) in interest than the actual sell price of your house...will your house EVER be worth the ACTUAL price you paid for it?
Like...your $100,000 house that you actually ended up paying $267,000 for (rough estimated based on trulia.com calculation)...is your house EVER going to be worth that price? Probably not. Then again, if you dig in your heels and pay all cash or mostly cash, take out a 15 year loan and pay it in half or a quarter of that time...it's probably worth it.
But you would have had to pay rent during that time. When we bought we were paying $1035/month for a 900 square foot, 2 bedroom, one bath, 1 covered parking space apartment. If we had continued paying that amount for the last 9 years, 7 months (and if the rent didn't go up at all) we would have paid $119K in rent.
Our mortgage payments (including taxes & homeowners insurance) would have been about $161K.
So, how *I* view it is not that my house cost $161K, but the amount that WOULDN'T have gone to rent. So, $161K- $119K = $42 K
And our house has increased in value conservatively at least $100K (this is $125K under it's high value). AND we would owe approximately $40K less on the house than we did at the beginning.
So, for a $42K investment, we would end up coming out over $100K ahead. And this is across a very bad housing market. If we had sold at the height, we would have been looking at $200K instead.
So, yes, I would say it is very possible to have a house that ends up being worth much more than you put into it. You just need to remember that you need a place to live and to account for that accordingly. Oh, and of course, during that time I was living in a house in a better school district with a two-car garage and twice as much space as the apartment. Quite the deal, huh?
Originally Posted by ahilal
I bought in late 2006 at the peak of the market and paid high San Francisco Bay Area prices. Depreciation here has been close to 25% so I've lost my entire down payment and more. Am slightly underwater. I know many are worse off but in my book this venture turned out pretty horribly and I have lost untold sleep over it.
But I still find it hard to regret buying. Here are my perspective points:
1) The mortgage interest tax write off is absolutely huge. It brings us a massive tax refund each year when otherwise we'd still owe.
2) Property taxes eat up about half of this windfall, so that partially evens out
3) But if you take what's left and spread it out over 12 months, it brings our monthly mortgage costs well underneath what it would cost to rent our place.
The math may be different for everyone depending on that price of your home and your wages. But in our case, buying led to a really nice month-to-month situation, even if the total overall situation was a disaster. We like our place and we're happy to stick with it for a while. Our roof could fall in and that would throw all of my math off. But so far we're holding tight.
And that is the BIG lesson to take from this. We have never viewed our house as an investment. We have viewed it as a place to live. A house is a hedge against inflation--- once you have a set mortgage, your living costs are locked in a bit more than if you are in an apartment. It's worked for us and it's worked for a lot of other people as well.