MyNewPlace Blog

Last week, on the front page of the Personal Journal section of the Wall Street Journal was a lengthy article profiling families who had bought a house, but ended up needing to move and then couldn't sell their house for anywhere near the amount they had bought it.

Instead of taking the hit on the difference between what they had paid for it and the current market rate, they decided to hold on to the house and wait for it to increase in value. In the meantime, they are defraying some of the mortgage cost by renting their homes and waiting for a market recovery.

According to the article, there are an increasing number of families in this situation, as evidenced by the rising number of homeowners converting their insurance to landlord policies; Allstate reported a 27 percent increase over last year.

This story really drives home the potential consequences of not heeding the “five year rule," which cautions against buying a home unless you know that you'll be there for more than five years. Even in favorable market conditions, families that sell their homes within four years of purchase, typically pay 19 percent more as owners than they would have paid as renters. Transaction costs, property taxes, property insurance and the costs of maintenance all add up very quickly. Add to this a real estate market that has recently plummeted, this really puts some people in an extremely unenviable situation.

Over the next few weeks, we'll be featuring snippets from an article authored by the National Apartment Association (NAA) and the National Multi Housing Council (NMHC) entitled Don't Buy the Myths: Renting Can Be a Smart Decision. The Rent vs. Buy article focuses on 9 widespread misconceptions regarding the benefits of homeownership over rental apartments.

MYTH# 4: As an owner, my housing costs will stay constant. I won't have to worry about rent increases.

Reality: A mortgage payment is only one of many housing costs.

Last week, we discussed the Hidden Costs of Owning a Home, and concluded that monthly housing costs will amount to your mortgage multiplied by 1.4. This extra 40 percent includes maintenance costs, property taxes, and homeowners insurance, all of which can add up quickly.

Not only must you account for these costs, but you can also expect them to increase. Property taxes and homeowners insurance have risen significantly in recent years.

Homeowners saw annual property tax hikes averaging 4-5% (for a total increase of 18%) between 1997 and 2001. According to the Insurance Information Institute, the average premium for homeowners insurance rose from $488 in 1999 to $764 in 2005.

Rent increases pale in comparison to the rates at which these two major costs increase over the years. Instead of pouring money into a money pit, you could be saving, investing or going on vacation.

For more information, check out the full Rent vs Buy article, which can be found at the MyNewPlace Apartment Guide.

Check back next week when we will feature Myth #5, “Buying a House is a Safe Investment."

Over the next few weeks, we'll be featuring snippets from an article authored by the National Apartment Association (NAA) and the National Multi Housing Council (NMHC) entitled Don't Buy the Myths: Renting Can Be a Smart Decision. The Rent vs. Buy article focuses on 9 widespread misconceptions regarding the benefits of homeownership over rental apartments.

MYTH# 3: My mortgage payment will be less than my rent.

Your mortgage payment is just the beginning. The “hidden costs" of ownership can add up to thousands of dollars each year.

Do not expect to be able to afford a $1,000 a month mortgage because you can afford $1,000 for apartment rent. According to Suze Orman, your annual budget for additional homeownership costs should be around 40-45 percent of your mortgage. That means you'll need to budget more than $1,400 per month for housing costs, not $1,000.

What makes hidden costs drive up monthly housing expenditures?

• Property taxes: If you own a $200,000 home and your property taxes are 1.25 percent (the U.S. average is 1.38 percent, with a high of 2.21 in New Hampshire and a low of .40 in Hawaii) then you'll need to budget around $200 each month just for property taxes.
• Maintenance costs: Now that you are financially responsible for the upkeep of your home, you'll need to budget about 1 percent of the cost of your home for repairs and maintenance. For a $200,000 house, this will be more than $150 a month.
• Private Mortgage Insurance: If you make a down payment of less than 20 percent, you are also going to need to pay around $100 a month in PMI costs.

So, in this example, you would be paying around $1,450 per month for housing costs, a substantial jump up from $1,000 rent. Be sure to factor in these costs, as well as homeowner's insurance, before you make the decision to buy a home.

For more information, check out the full Rent vs Buy article, which can be found at the MyNewPlace Apartment Guide.

Check back next week when we will feature Myth #4, “The Myth of the Constancy of Housing Costs."

Over the next few weeks, we'll be featuring snippets from an article authored by the National Apartment (NAA) and the National Multi Housing Council (NMHC) entitled Don't Buy the Myths: Renting Can Be a Smart Decision. The article focuses on 9 widespread misconceptions regarding the benefits of homeownership over apartment rentals.

MYTH# 2: Paying rent is throwing away money. I could be building equity.

During the first five years, more than 80% of your monthly mortgage payment goes directly to interest. Furthermore, since nearly one third of all homeowners move within five years, they never have a chance to start building any real equity. Also, if you take into account the money spent during that time on maintenance, taxes, insurance and the costs to buy and sell their house, most would have saved money by renting.

If you were to buy a $200,000 house with a 5% down payment at a 6% interest rate, you will have paid $55,152 in interest and only $13,196 in principal, after five years of mortgage payments. In addition, you will likely have paid between $10,000 and $20,000 in maintenance and repair to earn that equity.

Chances are you could earn more than this in a number of investments that are more diversified and less risky than putting all of your eggs in one basket. For more information on Diversifying Your Portfolio by Renting, see that blog post, which discusses the rent vs own debate from an investment perspective.

For more information, check out the full Rent vs Buy article, which can be found at the MyNewPlace Apartment Guide.

Check back next week when we will feature Myth #3, “My Mortgage Will Be Less than My Rent."

Over the next few weeks, we'll be featuring snippets from an article authored by the National Apartment (NAA) and the National Multi Housing Council (NMHC) entitled “Don't Buy the Myths: Renting Can Be a Smart Decision." The article focuses on 9 widespread misconceptions regarding the benefits of homeownership over apartment rentals.

Myth #1- I'll Reduce my Tax Bill By Owning a House

The first homeownership myth that we'll be examining is that you can reduce your tax bill by owning a home. Unless the interest on your mortgage is greater than the standard deduction for joint filers, (the article uses the 2003 amounts for single and joint filers, which were $4,750 and $9,500 respectively) then there is no tax advantage to owning a house.

For example, if you bought a house in 2003 for $200,000 with a 5 percent down payment with 6 percent interest rate your total savings would be $514, assuming that you are in the 28 percent tax bracket. You indeed would have been able to deduct $11,336 in mortgage interest, but after you include other homeownership costs (maintenance alone is typically 1-2 percent of the house's value annually) you may find that the tax alleged tax breaks that you had hoped to capitalize on are not exactly what you had imagined.

You can use some online calculators to determine the amount that you would be able to deduct, such as the one at Money-Zine. There are also a few articles about the mortgage tax reduction located at Investopedia and the American Chronicle.

Be sure to check out the full article, which can be found at the MyNewPlace Apartment Guide. Check back next week when we will feature Myth #2 Paying Rent is Throwing Money Away.

At the most basic level of financial investment, there are two maxims that can often be mutually exclusive. The first is to hedge your bets by diversifying your portfolio and spreading out your risk. The second is to invest in where you live; more specifically, if you are going to be paying a large percentage of your income towards your home, then it makes a lot of sense to be making payments towards something that you will someday own and may also, if all goes according to plan, appreciate in value.

The problem with all this great advice is that it can be difficult to diversify your portfolio when all your money is going towards a mortgage. This rings especially true during a turbulent market when people's adjustable mortgage rates are increasing and forecasted appreciation is suspect; it is making more and more sense, from an investment perspective, to rent an apartment rather than buy a house.

This strategy is buttressed by a study done by three Federal Reserve economists, who looked at the long-term relationship between home prices and rents. They found that from 1960 through 1995 annual rents averaged from 5 to 5.25 percent of home prices. Then the figure started falling dramatically after 1995, reaching 3.5 percent at the end of 2006. In other words, rents are unusually low relative to home prices, and to get back to normal, apartment rents would have to soar or prices to plummet.

Check out this video from CNBC, which features a contentious conversation between R. Donahue Peebles, Chairman and CEO of The Peebles Corporation and Wall Street Journal Editor David Crook concerning the pros and cons of buying a house as an investment. The two debate the potential returns over both the short and long term in the housing market versus alternative investing options.

Net, net, if you're on the fence as to whether to own or rent your next place, try to focus as much on the economics as on the excitement of having your own white picket fence. Be sure to research adequately and explore and compare your options by using internet resources such as MyNewPlace so that you know that you are making an informed choice that will meet your needs.

Let us know about your experiences on making decisions on whether to buy or rent from an investment perspective. Have you found that buying a home has put all of your investment eggs in one basket?