New American Dream is renting to get rich

Discussion in 'Economics & Trade' started by OldMercsRule, Feb 16, 2012.

  1. OldMercsRule

    OldMercsRule Member

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    "(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/2012/02/15/us-housing-americandream-idUSTRE81E1LG20120215

    Hmmmmmmmm..........
     
  2. raymondo

    raymondo Banned

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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 .
     
  3. Anikdote

    Anikdote Well-Known Member

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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.
     
  4. Reiver

    Reiver Well-Known Member

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    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)
     
  5. Anikdote

    Anikdote Well-Known Member

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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.
     
  6. Reiver

    Reiver Well-Known Member

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    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. waltky

    waltky Well-Known Member

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    Granny says dem politicians an' bankers is in cahoots to kill off the middle class...
    :confused:
    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.
     
  8. Not Amused

    Not Amused New Member

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    ?!? $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. waltky

    waltky Well-Known Member

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    American Dream Is Out Of Reach For Most...
    :steamed:
    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.
     
  10. CourtJester

    CourtJester Well-Known Member

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    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.
     
  11. Reiver

    Reiver Well-Known Member

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    And, if they can't maintain housing quality, their well-being goes through the floor. Analysis has shown, for example, that home owners are more likely (other things equal) to have mental illness problems. Pressure for you
     

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