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Thread: New American Dream is renting to get rich

  1. Default New American Dream is renting to get rich

    "(Reuters) - Rich Arzaga owns a luxury home in San Ramon, California, but he's not betting on it as an investment.

    The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home -- or any home, for that matter -- as a financial investment, and Arzaga balks.

    "It's the American Dream to own a home, but whoever said that didn't do the analysis on it," says Arzaga, knowing he's taking a contrarian stance to conventional wisdom.

    Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, "100 percent of the time it was better to rent, rather than own."

    That's right: 100 percent.

    The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs - what's needed to hold and maintain the asset - range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.

    "I don't have the emotions a lot of people do surrounding real estate," Arzaga says. "I have steely eyes for how investing in real estate works, and I'd better be a prudent investor for my clients."

    Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners "not to meet their financial goals. They were going to fail."

    Some real estate experts thought there was some truth to Arzaga's argument, albeit with several conditions.

    "To state that owning a home is or isn't a good investment is too simplistic," says Jeffrey Rogers, president and COO of Integra Realty Resources. "It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn't be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead."

    "Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return," says Jed Kolko, chief economist at Trulia.com,

    a real estate search and research website. "But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it's probably a bad investment for you. It also depends on your job market. If you're in a one-company town and the company goes down, there goes your job and there goes your home value."

    Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga's. "Home ownership is not so much a creator of wealth as a store of wealth," he says. "The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn't rebate a dime."

    The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.

    "You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children," McBride says. "There's no sense in buying a home if it's going to deplete your emergency or retirement savings."

    McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is." (See the full chart at link.reuters.com/hej66s)

    Then there's the emergency fund, a must for when a home requires unexpected repair work.

    "As far as emergency savings is concerned, six months of a cushion is adequate," McBride says. "But only 24 percent of people have that kind of cushion, and about 65 percent own homes."

    So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn't pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.

    So why not sell? For Arzaga, it's a lifestyle choice, and one that he doesn't regret, since his big money-making investments are elsewhere.

    (Editing by Bernadette Baum, Beth Pinsker Gladstone and Andrew Hay)

    http://www.reuters.com/article/2012/...81E1LG20120215

    Hmmmmmmmm..........

  2. #2
    england us georgia
    Location: Brighton , UK
    Posts: 4,298
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    The analysis is correct and it is one I have been advocating since the the first US bubble appeared on my radar --- 2006 .
    But of course , the analysis is often irrelevant when the property or house is a Home .
    Different criteria apply .
    However , in a free situation any savvy person would have transferred everything into commodities by 2008 at the latest .All would be millionaires now and often several times over .
    The same scenario exists today . House /property prices are certain to fall further and commodity prices will continue in their overall bull market phase for about another decade .
    Human factors aside , only fools own .IMO .

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    In a labor market such as the one we're currently experiencing, home ownership may be even more of a burden. Owning a home means it's difficult to go elsewhere for employment, you basically stuck in your geographical market plus or minus however far your willing and able to commute.

    Bureaucrats passing legislation that made it easier for Americans to own homes did more harm than good, great now you own a home... but your stuck here and now your house isn't worth what you paid for it, enjoy!

    The deep insights in the OP really helped to fuel this discussion, stellar contribution.
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  4. #4

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    Quote Originally Posted by Anikdote View Post
    In a labor market such as the one we're currently experiencing, home ownership may be even more of a burden. Owning a home means it's difficult to go elsewhere for employment, you basically stuck in your geographical market plus or minus however far your willing and able to commute.
    The only difficulty with the Oswald Hypothesis is how the home owner can respond to the reduction in labour mobility. They could, for example, simply reduce their reservation wage. End result? Home ownership, rather than increasing equilibrium unemployment, will increase labour exploitation. Funny ole American Dream (in the first place)

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    Unfortunately homes and real estate are very difficult to buy and sell, the process is complicated, there are several other parties involved and they are very expensive. Perhaps if the process of buying/selling a home weren't riddled with so many frictions it wouldn't be such an issue.

    Home ownership has it's potential pitfalls, but it's also one of the most sound investments you'll ever make in your lifetime. A secondary, and hopefully forthcoming solution to the issue is improved transportation, though many are stubborn to the idea. And now that I think on it a moment, a tertiary way to alleviate these types of issues is technology such as the ability to tele-work/remote access.
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  6. #6

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    Quote Originally Posted by Anikdote View Post
    And now that I think on it a moment, a tertiary way to alleviate these types of issues is technology such as the ability to tele-work/remote access.
    Its a transaction cost problem and therefore more pertinent, except in the special case of negative equity, to the lower paid. They tend to have more hierarchical arrangements suited to maximising economic rents from their employment (accentuating the costs from housing tenure)

  7. Icon15

    Granny says dem politicians an' bankers is in cahoots to kill off the middle class...

    Homeownership falls to lowest rate in 15 years
    April 30, 2012: Homeownership in the U.S. fell to its lowest rate in 15 years during the first quarter as more delinquent borrowers lost their homes to foreclosure, forcing many to rent.
    The percentage of Americans who own their homes dropped a full percentage point over the past 12 months to 65.4% during the first three months of 2012, according to the latest Census Bureau data. That's the lowest rate since 1997 and down from the peak of 69.2% reached in 2004. "As foreclosures grew over the last six years, many homeowners became renters," said Alex Villacorte, director of analytics for Clear Capital, a real estate valuation company. The rental vacancy rate dropped to 8.8% during the first quarter, down from 9.7% a year earlier and from 9.4% in the last quarter of 2011, according to Census.

    The growing demand has put pressure on the rental markets, said Villacorte. In many depressed housing markets, investors have been buying up distressed properties -- foreclosures and short sales -- fixing them up and renting them out. The median asking rent last quarter was $721, up 5.6% from 12 months ago, according to Census. Rents are highest in the Northeast, where the median is $932, followed by the West ($845), the South ($660) and the Midwest ($607).

    Meanwhile, median home prices continue to fall. During the first quarter 2012, the median asking sales price for vacant units was $133,700. That's down from $143,700 during the first quarter of 2011, according to Census. Homeownership has fallen for all age groups, races and regions since the housing boom, Census reported. It is lowest in the West, where it has dropped one percentage point over the past 12 months to 59.9%. The Midwest has the highest homeownership rate at 69.5%, down 0.9 point year-over-year; the South is second at 67.5% (down 0.9 point) and the Northeast is third at 62.5 (down 1.4 point).

    Source
    Logic is the beginning of wisdom - Vulcan proverb

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    Quote Originally Posted by OldMercsRule View Post
    "(Reuters)McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga's view credence: "Homeownership may not be the moneymaker you think it is."
    ?!? $395,404 to break even?

    In 2004 a 30 year loan ran about $6 per thousand borrowed, 200K home, with the closing costs amortized into the loan, $1233 a month, add $100 a month for insurance and $100 a month for maintenance, subtract $300 a month for tax savings, effective cost is $1133 a month. $1133 a month for 10 years, $135,960, add the original $205.5K borrowed, $341,460.

    Then the break even cost is only after 10 years of rent is subtracted. Even assuming $800 a month (a 30 year loan won't go up, will rent stay the same over 10years?), and $50 a month for renters insurance, the selling price would need to be $239,460, an appreciation of 1.54% a year.

    And I don't believe $800 a month in rent. My son bought a condo 3 years ago for $99K, a year ago got married and bought a home, keeping the condo as a rental. It is renting for $950 a month. His cost for principle, interest, insurance and homeowners fee, $850 (not counting any tax benifits). He bought because it was cheaper than renting.

    At $1100 a month, or more, in rent, buying costs less on a monthly basis than renting.

    During the bubble (when his condo sold for $220K), renting made much more sense.

    As far as labor mobility, it depends on where you live. His condo is in central San Diego, a 45 minute drive (a typical commute in southern CA), or taking the train to LA, gives him access to more than enough employers.

  9. Icon17

    American Dream Is Out Of Reach For Most...

    The American Dream is out of reach
    June 4, 2014: So say nearly 6 in 10 people who responded to CNNMoney's American Dream Poll, conducted by ORC International. They feel the dream -- however they define it -- is out of reach.
    Young adults, age 18 to 34, are most likely to feel the dream is unattainable, with 63% saying it's impossible. This age group has suffered in the wake of the Great Recession, finding it hard to get good jobs. Younger Americans are a cause of great concern. Many respondents said they are worried about the next generation's ability to prosper. Some 63% of all Americans said most children in the U.S. won't be better off than their parents. This dour view comes despite most respondents, 54%, feeling they are better off than their own parents.



    The downbeat mood is not surprising, say economic mobility experts. "The pessimism is reflective of the financial realities a lot of families are facing," said Erin Currier, the director of the Economic Mobility Project at Pew Charitable Trusts. "They are treading water, but their income is not translating into solid financial security." The vast majority of Americans have higher incomes than their parents, but that's in large part because most families have two earners now, she said. Only half have more wealth, she said. Meanwhile, the savings rate is low and unemployment is high. College costs are rising faster than inflation and student loan debt is exploding.

    People also tend to be more pessimistic about the next generation's fortunes in general than their own children's prospects, Currier said. In Pew's polls and focus groups, parents say that it will be tougher for their children to succeed, but they still believe it's possible. Perceptions, however, aren't supported by the facts, experts said. The American Dream is not dead, said Ron Haskins, co-director of the Brookings Center on Children and Families.



    Two landmark studies released earlier this year concluded that mobility is worse in the U.S. than in many other developed countries, but has not changed significantly over time. Researchers found significant differences in mobility across the nation. Those who live in areas with higher economic growth, better schools and fewer African-American residents have a greater chance to climb the economic ladder. "Mobility is an issue, but it hasn't gotten any worse," Haskins said.

    http://money.cnn.com/2014/06/04/news...html?hpt=hp_t2
    Last edited by waltky; Jun 04 2014 at 08:00 AM.
    Logic is the beginning of wisdom - Vulcan proverb

  10. Default

    All things being equal home ownership may not be a great investment on paper. However, for some people paying a mortgage is a form of forced savings that they will not do otherwise. For people who live paycheck to paycheck this may be the only savings they have.

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