The following is a brilliant guest post by my financially minded husband, David Hawkins. He wrote the following article at my request about Why we are not buying a home.
One of Tammy’s friends recently asked her if we were looking to buy a house soon. Tammy responded that we were not. It may seem like right now is a great time to buy a house. After all,
- Interest rates are low
- We are young
- We have no other debts
- We have disposable income to invest, and
- Prices have come down
These are all reasons that would have normally lead a rational person to purchase a home. It is the American Dream, isn’t it? However, I believe that this American Dream would be better off waiting. Now is a bad time for first time buyers to jump into this market. Here’s why:
Buying is more expensive than renting
You can rent 1 – 2 bedroom condos in San Diego for roughly $1,000 – $2,000 per month. The monthly mortgage payment on the same property will cost you an additional 50% or more. Said differently, if you currently rent an apartment for $1,200/month and decide to purchase the exact same apartment next door, you can expect your mortgage payment to be at least $1,800. That’s $600/ month down the drain. If you don’t believe me, check craigslist apartment listings and then go to zillow.com to see what a comparable mortgage would cost.
The increased cost does not stop there. If your down payment is less than 20% of the value of the home you will be required to purchase Private Mortgage Insurance (PMI). Other hidden costs include: Property Taxes, Home Owners Association (HOA) Fees and Maintenance.
Maintenance can be particularly expensive. A friend of mine just purchased a small starter home in San Diego. Less than 6 months later the roof started leaking and he had to come up with $10,000 to fix it. Who wants that kind of risk?
Real Estate is a bad investment
The only reason one would purchase a condo or small home given the increased cost just described is if they think that the value is going to go up. Who cares if you spent an additional $600/ month on a mortgage if you are going to be able to sell the condo in 3 years for a $50K profit? Well, I hate to break the news to you, but those days in real estate are gone.
Historically speaking, real estate was a fairly good investment during the declining interest rate environment from about 1980 to 2007 (see the chart below). This was the time period in which most of our parents made some good money in real estate. It is also happens to be the same amount of time in which most new home buyers have been alive. In other words, new home buyers have only seen a long term bull market in housing their entire lives. However, interest rates have literally hit bottom and they will only be going up from here. It behooves the first time homebuyer to take a longer term view of things and keep an open mind.
The chart below shows that historically speaking (looking at a much longer 100 year-trend line), housing increases in value only slightly above inflation (I would argue that it is actually at inflation or below, but that is another article) This long term trend is very different from the synthetic real estate boom experienced in the last 10 to 30 years. We can expect housing values to revert back to the long term trend. As you can see from the chart below, there are more price decreases to come.
In fact, with a bleak economic prospect stretching far out into the future, a 10% dip below the 100-year trend line is a reasonable expectation within the next five years, particularly if mortgage rates rise to more typical levels of 6%. That would put prices 28% below where we are now. Even a 5% dip would put us 24% below current prices.
One of the Wall Street sayings that I have always liked is: the trend is your friend. In this case, the trend is down. Don’t fight the trend. Make it your friend!
There are better investments
Well, if I have disposable income and I have already paid off my credit card, auto and student loans, where should I invest? By the way, please do pay off all debt before investing in anything including a home. (More on debt later)
I could devote a book to the subject of where to invest and how, but I will condense the response for the sake of this article: Invest in Gold and Silver. There is a long term trend at play here and you still have time to make this trend your friend.
Gold has been increasing in value by roughly 20-30% per year for the past 10 years. Silver increased 75% last year. This bull market has a long way to run. Many are calling it a bubble and I do agree that it eventually will be a bubble. However, we are not in the bubble-mania phase yet. There is still room to go.
My proof that the peak of the gold/silver bubble has not hit yet is that YOU have no idea what gold is valued at right now. When the bubble hits the top, the average American will know the price of gold and will have invested in it. Just like the Real Estate and .COM bubbles, when the average Joe is participating and making money blindly in precious metals, it will be time to hit the exits.
With the value of homes going down and the value of precious metals going up, you should be able to take what you would have used to make a down payment of 20%, and purchase a house outright in 5 years with cash…simply by making two trends your friend.
Enormous amounts of debt is not a good thing
If you do purchase a home and go into debt to do so, you can expect to pay twice as much as the house is worth over the life of the loan. In other words, your mortgage payment not only goes towards paying off the house, you also pay interest to the bank. If you add up all the interest payments over the life of a 30 year loan it is usually equal to the value of the home. You just paid for 2 houses, but only got 1!
Debt is a funny thing. Our modern economy is built on it (and might collapse on it too). We are told that banks need to lend in order for jobs to come back. We are told that consumers need to stop saving and start spending on their credit cards if the economy is to improve. My instincts tell me this is wrong.
Most major religions including Islam, Judaism, Christianity and Mormonism have an aversion or even outright rejection of debt. Proverbs suggests the reason why: ‘The rich ruleth over the poor, and the borrower is servant to the lender’ (Proverbs 22:7). The Apostle Paul commanded the Christians to ‘owe no man anything’ (Romans 13:8). Debt can be like a chain that binds, turning the borrower into a slave to the lender.
Break off the Chains of Debt and Enjoy Freedom…you may need it someday
Purchasing a home with debt locks you down. You lose the ability to be flexible about where you live. This has happened to many people. They buy a house in a city where they work. Then the economy changes and they need to move. However, the house has gone down in value so they can’t afford to move, even though they can’t afford to stay either.
In this economy, it makes more sense to embrace a lifestyle that affords you freedom of movement.
Let me know if you found this helpful!