There's No Shame in Renting, Home Prices Will Fall

Discussion in 'Random Ramblings' started by chickenfeathers, Dec 9, 2007.

  1. There's No Shame in Renting, Home Prices Will Fall

    Dec 03, 2007

    In our society, there is a prevailing assumption that buying is better than renting. The fact is, there is no shame in renting, especially right now. Home prices are due for a major correction. When prices finally hit bottom, renters are one of the few groups whose finances will survive the crash.

    Renters are always being bombarded by the same question: 'When are you going to buy a house?'

    Nobody ever assumes that the decision to rent is a conscious choice. People have become so enthralled with status that they seem to have forgotten the reason why we live under a roof and between four walls--shelter.

    At one point, that's all a home really was. Nowadays, things are a bit different. Owning a home has not only become the equivalent of owning a piece of the American dream, it has become a way to measure success.

    An overwhelming number of people embraced this concept during the most recent housing boom. Home prices began to swell beyond reasonable levels as more and more people bought into the market.

    It wasn't long before it became impossible for most people to buy median-priced homes on median incomes. By 2005, people were spending 60 percent more on average in the largest metro areas to buy rather than rent.

    This should have been enough to deter potential home buyers, but it was not. People were still buying into the idea that a home is the best investment an American can make.

    They were so confident in their beliefs that they were willing to finance their dreams with preposterous mortgage products like interest-only loans and option ARMs. The desire to keep up with the Joneses was so strong that some went as far as to lie about their incomes and their ability to afford the required monthly loan payments. In short, they committed mortgage fraud just so they could buy their homes.

    Were these people really that ashamed to admit that they couldn't afford to buy? Was renting so embarrassing that they were willing to risk their financial futures and possibly even their freedom?

    Why Home Prices Will Fall

    Source: NAR; US Census Bureau

    As you can see from the graph, affordability problems first began in 1997 and have since culminated in the biggest price bubble in U.S. history.

    The home prices we see now are not sustainable. They are built upon an artificial foundation instead of upon the traditional fundamentals that have always ruled the housing market.

    You see, it is not right for median incomes to increase by only 10 percent when median home prices increase by 50 percent during the same period. Any time the two deviate, a bubble forms and pops.

    In the end, home prices always fall back to previous levels. It's the way markets work.

    Renting is Smart

    If you want to play it smart during a housing bubble, renting is the best thing you can do. Renting is not risky. Unlike the people who bought in the last decade (or those who plan to buy in the next five years), renters have nothing to lose.

    When home prices begin to fall, homeowners stand to lose 100 percent of their investments. As equity erodes, any money they put down on their homes will disappear. But that's just a start.

    Prices are predicted to fall back to 1997 levels. If this happens, it will be devastating to homeowners who bought their homes in the last 10 years.

    Picture it:

    It's 2005. A family buys an overpriced house in San Diego for $550,000. They think they got a great deal.

    Flash to 2007:

    Home prices have already started to fall. By the time prices hit bottom (1997 levels) that $550,000 home will only be worth $250,000.

    But the family still owes the bank more than $500,000. Refinancing or selling is out of the question. Renting the house out to someone else is also not an option--no renter is crazy enough to cover those mortgage payments.

    The family is left with two undesirable choices: stay in their bad investment or hand the keys back to the bank.

    There is no shame in renting. If the family in the previous example had only realized this, maybe they wouldn't have been so quick to gamble with their future.

    Remember that the next time someone asks you when you are going to buy a house. Tell them about this example--or better yet, tell them you'll buy when buying makes sense.

    Agree or disagree? [​IMG]

  2. PurpleChicken

    PurpleChicken Tolerated.....Mostly

    Apr 6, 2007
    Whoever wrote this article is making some hard to prove assumptions. The biggest
    being that home prices are going to fall to 1997 levels. I see nothing to support
    this, especially demographics.

    If I didn't own my house, which I purchased in 2004, I would sit on the sidelines
    for a while. If one of my neighbors were selling there house for what I paid for mine
    in 04 I would buy it and rent it out or flip it for a nice profit. Foreclosures are up dramatically,
    building is down, and interest rates have risen slightly. Home prices in
    New England have only dropped slightly but the time it takes to sell has gone up a lot.

    As for the people who bought in poorly made homes, ridiculous prices, in 2006, well I have
    a bridge in Brooklyn I'd like to sell them. For a while it was the "In Style" thing for
    financial advisors to tell people to put money into real estate instead of the stock
    market. That is proving to be a BIG MISTAKE.

    There is no shame in renting and sometimes it's just better. It may be a financial
    reason or maybe the person just doesn't want the hassles of home ownership.
    People should never buy a home because of "peer pressure" or any other shallow
    Last edited: Dec 9, 2007
  3. Wildsky

    Wildsky Wild Egg!

    Oct 13, 2007
    Interesting. However I don't think the prices will drop as low as they were in 97.
    Last edited: Dec 23, 2007
  4. joanm

    joanm Songster

    May 13, 2007
    I rented for a long time before I bought my place in 1999 – no shame in that, but I always longed for my own place, and I bought what I knew I could afford.
  5. PurpleChicken

    PurpleChicken Tolerated.....Mostly

    Apr 6, 2007
    Congrats.. You bought in 99... Your are just fine... Have a glass of wine...

    We lived at my Mom's house for a few years before buying our house. It
    was the only way we could afford it.

    I laugh at people who think there is shame in renting. Try being 32 and telling
    people you live with Mom.

    For the record I moved to Georgia when I was 19 and bought my first condo
    at 20. I'm only saying this so people don't think I lived in my Mom's basement
    until I was 34 and bought a house. Talk about a stereotype.
    Last edited: Dec 9, 2007
  6. jjthink

    jjthink Crowing

    Jan 17, 2007
    New Jersey
    There is of course no shame whatsoever in renting (I know many people for whom it truly is the best choice including those who would stress too much with homeowner responsibilities and worries)but for those who are able - both mentally and financially - real estate is still a much better investment.

    While there are swings in the market, by and large over time real estate prices go up (like the stock market trends up). I know so many people who have rented their whole lives thus far mostly because they couldn't make the decision to take the plunge and now they're in their 50s and have absolutely no investment toward their future. Had they purchased even 10 years ago their house values would have at least doubled, even with the drop in real estate prices. That said, it is very painful paying high property taxes in some places, including my neck of the woods! I now pay 10 grand annually and it's always rising, for a little humble house - ouch - this is something renters can avoid. Even those with a mortgage paid off still have that monthly tax noose around their necks.

    There is a lot of speculation in the article, and it could do a disservice to those who buy it lock, stock and barrel. Having been a student of the real estate market for a long time, a realtor on the side to raise funds for my animal rescue habit (main job is environmental nonprofit) and a former renter turned homeowner....that's just my 2 cents....[​IMG].
  7. PurpleChicken

    PurpleChicken Tolerated.....Mostly

    Apr 6, 2007
    Quote:Well said. You covered a lot of points I wanted to in my first post but didn't want to
    write a book.

    Taxes are outrageous, especially due to the crazy valuations.

    A comment on the 50 somethings. If a 50 something rented but put the extra money
    he/she may have saved into an average mutual fund they would be better off than
    owning(on average, not the rule). Trouble is most people that don't own a home
    in their 50's don't have investments either. I have many freinds and family, in
    their 50's, with homes that are paid off or have tiny mortgages. Even without 6
    figure portfolios they will survive at retirement.
  8. KKluckers

    KKluckers Time Out

    Sep 4, 2007
    I do agree with all of what everyone is saying, but I think the prices are ridiculous in some areas. My friend bought a house three years ago for 145,000 and they just put it on the market for 260,000. That much jump in price is really unacceptable IMO. I know prices should go up, but 100.000 +? The house is dinky and there is no way I would ever spend that. There's not any reason either why it should of jump so much. That is one of the main reasons why my family and I will move out of Washington unless the prices do become somewhat reasonable. I live in Cle Elum and there is a new resort built about 10 miles down the road. The prices around here have jumped a lot. I rent so that's ok. Mostly retired people live in these parts and cant afford the jump in taxes. Most of my father in-laws friends are selling there homes and moving to Arizona and other places where it is more affordable. Its just sad to see all the people who are pretty much forced to move out of property owned by there family for over a hundred years.
  9. lexustami

    lexustami Songster

    Jun 14, 2007
    St. Clairsville, OH
    We bought a townhouse in East Central Florida in 2003. We paid 75k for a 3 bedroom, 1200 SF home with almost no yard. We sold that same house just 2 1/2 years later for $175K. Nice 75K profit.

    Anyway, we didn't think that house was worth 75K when we bought it but it was what we could afford at the time. We never thought in a million years we would ever make any money off of it.

    Circumstances changed and we had to sell it so we could move in with my parents to help them out during their cancer treatments.

    We used some of the money for a down payment on a farm in Ohio. That was going to be our retirement property.

    We had planned on buying my parents house from them and living there. Things changed, my Dad died from his cancer and my Mom went nuts. She decided to move to Tennessee with my brother. She decided she didn't want to sell the house to us for what we thought the house was worth. (it needed a lot of work) So, now we were houseless. We had too many animals to rent and I wasn't willing to give up my dogs. With the house prices in Florida sky high (not to mention the property takes and insurance) we could not afford to buy another house down there.

    We looked into building a house on our Ohio property and moving there but decided against it. We couldn't afford a $180K house on top of the mortgage payment on what we still owed on the farm. We opted to buy an existing house just down the road from our Ohio farm property. We found a nice house that we could afford.

    So, we moved out of Florida and for the most part, haven't looked back.

    Here is a followup on my Mom's house. After we bought our Ohio house she decided to sell to a "we buy ugly houses" company for $136K. We could have easily afforded that amount and would have gladly bought the house from her for that amount. The "ugly houses" place remodeled a bit and placed the house on the market for $265K. The price has now dropped down to $179K and is still on the market. (over a year later)

    One day, we will build a house on our farm property, but not any time soon.

    This is just my house buying experience.

    Take care,

    Last edited: Dec 9, 2007
  10. DuckLady

    DuckLady Administrator

    Jan 11, 2007
    NE Washington State
    While I wouldn't give up our home for anything, I still miss being able to call the landlord when something needs fixing. LOL

    We bought an acre in 2002 with no utilities or septic or home. We put all that on there and at the time we thought we were nuts. BUT, it is a neighborhood that is fantastic. The last one acre parcel in an area that is now zoned minumum 5 acre lots. Low turnaround here, too. Well, we had the money and we bought, built and did everything we needed to.
    We plan to retire here, we don't owe much on the mortgage. The market value has steadily climbed and now it is worth over double what we put into it. This area is slowly building up, most notably 2 subdivisions of 5 acre lots with mansions selling for $1M +. It certainly hasn't hurt the home values in the area. Our taxes have stayed down, too. We put a Palm Harbor 1800 SF manufactured home on our property. Pit set, landscaped and permanent with sidewalks, patios and walkways. The stick built 440 SF garage is attached. The tax assessment states "mobilehome with attached garage." Hehehehehe. They can call it a cardboard box for all we care if it keeps the taxes down.

    But as in everything else, value is relative. It is only worth what you can get someone to pay for it. To us, our home is priceless. I am sure a buyer would not agree. [​IMG]

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