Replies

That all depends...

What are their arguments?

"There are great tax advantages to owning."
FALSE. It is much cheaper to rent a house in the San Francisco Bay Area than it is to own that same house, even with the deductibility of mortgage interest figured in. It is possible to rent a good house for $1800/month. That same house would cost about $700,000. Assume 6% interest, and we can see that a buyer loses at least $4,936 per month by buying. Renting is a loss of course, but buying is a much bigger loss.

Renting:

Rent: $1,800

Monthly Loss: $1,800

Buying:

Property Tax: $486 ($729 per month at 1.25% before deduction, $486 lost after deduction.)

Interest: $2,333 ($3500 per month at 6% before deduction, $2333 lost after deduction.)

Other Costs: $450 (Insurance, maintenance, long commute, etc.)

Principal loss: $1,667 (Modest 3% yearly loss on $700,000. Reality will be much worse.)

Monthly Loss: $4,936

This is a very conservative estimate of the loss from owning per month. If you include a realistic decline in house prices, as in this rent-vs-own calculator, you'll see that owning right now is a very poor choice. Here's a more optimistic calculator which ignores price changes entirely. House value losses will stop eventually, but it could take 5 or 10 years to bottom out.

Remember that buyers do not deduct interest from income tax; they deduct interest from taxable income. Interest is paid in real pre-tax dollars that buyers suffered to earn. That money is really entirely gone, even if the buyer didn't pay income tax on those dollars before spending them on mortgage interest.

Buyers do not get interest back at tax time. If a buyer gets an income tax refund, that's just because he overpaid his taxes, giving the government an interest-free loan. The rest of us are grateful.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house. To rent money is to take out a loan. A mortgage is a money-rental agreement. House renters take no risk at all, but money-renting owners take on the huge risk of falling house prices, as well as all the costs of repairs, insurance, property taxes, etc. It is now much cheaper to rent the house than to rent the money.

There are large tax disadvanges to buying in California. Because of Proposition 13, it is common for new buyers to pay ten times the property tax that their neighbors pay. Tax rates are set at the time of purchase, which means those who bought long ago pay nearly nothing, and the new buyers pay all property tax for everyone else. Upgrading houses makes you a newcomer all over again.

http://patrick.net/housing/crash.html

Interesting comments and thanks.

I guess for me, my bi-weekly mortagage payment was cheaper than rent. I am almost finished my loan - just a couple years left - and thus, will not have to make a monthly payment.

Oddly, when I bought in 1994, the market dropped my house by about 20,000 dollars. Now I am up by about 75,000 from my original price I paid.

You are right on the tax issue and of course the maintenance issue. But if I rent, part of my landlord's rental rate would go to the tax.

Having said all of that, your facts are correct and in those cases you have shown, renting would seem to be the way to go in certain circunstances.

Again, thanks for the information and take care.

There was something economically wrong with your information -- if it's much cheaper to rent than own, it would mean that everybody who is running rental property in San Fransisco is losing tons of money, and would be better off selling out.

So I did a quick google search for actual rental prices in San Fransisco, and here was the first set of 10 listings:

1 Bedroom, 1 Bath = $2,950
2 Bedroom, 2 Bath = $2,600
2 Bedroom, 2 Bath = $1,700
3 Bedroom, 2 Bath = $3,300
3 Bedroom, 2 Bath = $3,800
3 Bedroom, 2 Bath = $3,500
4 Bedroom, 3 Bath = $4,800
3 Bedroom, 2 Bath = $2,400
5 Bedroom, 3 Bath = $6,000
3 Bedroom, 1 Bath = $2,950

That averages to a 3-bedroom, 2-bath house (not large by any means) at about $3400, or about twice what your article suggested a rental would go for.

But that doesn't mean you are wrong. One advantage to buying that isn't listed is that, while it might be a negative cash flow now, you have locked in your costs. Rental costs could double in the next 10 years, and home prices could double as well, but you will be paying about the same 10 years from now as you do today (of course, your real estate taxes will be higher, as will your insurance payments).

In a housing market with known falling prices, it almost never is better to buy (if the price is cheap enough, it is possible that the loss of capital doesn't outweigh the savings of rental), but who knows WHEN the housing prices are going to fall, or when they will stop.

The pundits have been predicting the real estate price collapse for 3 years now. At the moment, people in OUR area who decided not to buy 3 years ago, but to wait for the collapse to "buy cheap", are looking at spending 20-50% more for their houses than if thy had bought then.

However, I don't think I'd buy a home right now, because I'd expect a lot of people are wondering like I would be, and would be hesitant, which should drive prices down a bit.

Of course, in our particular area there are not a LOT of empty houses waiting to be purchased, and we have increasing population AND employment, so people DO have to buy houses, and the supply is not outstripping the demand as badly as other areas.

I don't expect my property taxes to drop. When housing prices went up, they lowered our RATES so the increases were under 10%, mostly. I'm pretty sure they are addicted to the money, and as prices drop they will RAISE the rates to keep the tax money flowing.

I hate property taxes, they don't reflect either the cost to the government for providing services to your house, OR the ability of you to pay for those services. I don't think you should have to pay taxes based on how much stuff you bought is worth.

A "square-footage" tax might be better, or a "residence" tax, although they also have the problem of not reflecting people's ability to pay. But a "residence" tax would also discourage large groups of unrelated adults from living in a house.

If you don't own a house but want to live in one, your choice is to rent a house or rent money to buy a house.

That's a nice, clear summation that mortgage lenders should be required by Federal law to hang on the walls of their offices. ;)

Good post, but FR's resident money-lenders might give you grief for it. I actually do rent in the San Francisco Bay Area at 50-60% discount over what my monthly mortgage payment would otherwise be. I bought my house in Las Vegas in 2004 - paid cash using (rapidly depreciating) US dollars - and avoided all of the California market chaos. Maybe in a few years when higher-end properties tumble, California real estate will be worth another look...but by then, L.A. Mayor Villa-La-Raza will have been promoted to Governor, and I expect Californians with home equity will be facing some sort of state-wide special assessment tax to "Save Our Schools" or some other BS Democrat excuse.

There are large tax disadvanges to buying in California. Because of Proposition 13, it is common for new buyers to pay ten times the property tax that their neighbors pay.

There will be more squawking by the anti-Proposition 13 forces as the housing market continues to crash in our fair state. Whine, pule and sob, its just not fair!!. Well, hard cheese, newbie homeowners. You just paid a half million for a house that your neighbor paid 100 thousand for a few years back.

Base on what YOU paid, you've obviously got plenty of money to pay the ongoing ongoing ongoing tax that is based on YOUR willingly agreed-to purchase price.

Prop 13 drove a permanent knife into the heart of the California librat's tax and spend concept of paying a current "value" tax rate on every asset purchased at some prior time. All praise to Saint Howard Jarvis.

Because of Proposition 13, it is common for new buyers to pay ten times the property tax that their neighbors pay. Tax rates are set at the time of purchase, which means those who bought long ago pay nearly nothing, and the new buyers pay all property tax for everyone else. Upgrading houses makes you a newcomer all over again.

This only seems unfair if you assume everyones income has kept going up. We purchased our home in 1985 and it is true that we pay less property tax then someone who purchased the same model home across the street in 2006.

The point is, I could not afford to buy my home at today's cost.

I am close to retirement, my home is paid for, my property taxes is a managable $1,200 a year (it does go up a small bit each year). This is one thing that makes retirement possible.

So while it may seem unfair to base property taxes on what someone pays for their homes, it is really the only fair way. Otherwise we would go back to those days, when older retired people would lose their homes of 40 to 50 years because they can no longer pay the property tax, then where are they to live?

There are large tax disadvanges to buying in California. Because of Proposition 13, it is common for new buyers to pay ten times the property tax that their neighbors pay.

It's the best property tax plan in the nation and just because you pay more than your neighbor doesn't make it a "large tax disadvantage". When your new neighbor pays more than you, what is it then?... A tax advantage?

Where is it written that just because you chose to spend $500,000 for the house next to mine that I should also pay $5,000 a year in taxes for the home I've been paying taxes on for 20+ years?

It's your purchase that determines the valuation...you should pay more on the value based on what YOU paid.