SO I WAS AT A PARTY -- no, really, I was -- on Saturday night and the conversation, as one might have expected, eventually turned to the housing market. As one might also have expected, the conversation eventually turned to the question of why I, Benjamin Kepple, continue to rent an apartment as opposed to buying a house or condominium. The benefits of owning a house -- forced savings! appreciation! climb a rung on the ladder of prosperity! -- were expounded upon, and I offered up my various defenses for not buying accordingly. (They do not, as we shall see, revolve around the state of the market itself, although I am wary about it).
This was not the first time I have found myself discussing this. Over the years, I have had people -- including people I have just met -- express opinions ranging from befuddlement to pity (!) about my decision not to buy property. It's actually somewhat unbelievable -- it's as if I'm some kind of Communist for having no interest in buying a place. But when someone I trust completely for his advice on financial matters gently broached the subject -- it appeared at the time as if a Government tax benefit might have made a purchase more worthwhile -- I gave the matter more thought.
Well, there are certainly advantages to buying one's own place, I will admit that. For one thing, you own it and you can, subject to the rules and regulations in one's municipality, do what you want with it. For another, you freeze your cost of housing. Your mortgage payment will not -- at least, in terms of principal and interest payments -- go up unless you tap your equity or otherwise treat your house like an automated teller machine.
But when one looks at it in black and white, I am not convinced the numbers work out. At least not yet.
Let's say I borrow $150,000 tomorrow, at seven percent, to buy a place. Over 30 years, this represents a total payment of $359,266.59 to my mortgage company. Of this amount, $209,266.59 is interest. In my present situation, I pay $800 per month in rent for my two-bedroom apartment. (Yes, it is a good deal). Thus, paying rent of $800 per month over that 30-year period would work out to $288,000 in total payments. (True, I realize that my rent payment will not stay at $800 forever, but we'll get to that).
Anyway, the initial gain works out to $78,733.41, that is to say, it's the equivalent of: (equity) - (total payments - rent payments). Yes, I have banked $150,000 in initial equity on the property, but have paid a goodly amount in interest to buy it, so the real equity is not as great as one might think. Now, it is true that property tends to appreciate, and if we assume the property appreciated at 3 pc per year, it would be worth about $346,089 at the end of my mortgage. Thus the appreciation would work out to $196,089, for a total gain of $274,822.41.
Tax savings from interest payments start at $1,275 in the first year and wind down to about nothing after 15 years -- after that, I would take the standard deduction, you see -- and so we'll call that $10,000 for simplicity's sake. Tax savings from property taxes start at $625 in the first year and by year 30 will hit $1,517; we'll call that $32,000 for simplicity's sake. That works out to $316,822.41.
But -- and here's the grand but -- what about the costs over time that offset this gain?
Property taxes are a big one, especially here in New Hampshire, where property tax is the Government's key revenue generator. In the first year, my property taxes would be $2,485. In year 30, they would be $6,031 -- at minimum. (That figure assumes a 3 pc increase each year). Averaged out, that's $4,258 per year, and over 30 years that works out to $127,740. Our gain is now just $189,082.41.
Next, we have condo fees, which pay for things like heat, hot water, keeping up the grounds, and so on. $200 per month is not an unreasonable estimate. This works out to $2,400 per year in year one and, let's say, $4,800 in year 30. This works out to $108,000 over 30 years. Our gain is now just $81,082.41.
My insurance costs would notably increase -- about $500 per year, I am guessing, in year one. By year 30 that would cost about $1,100, so if we average that out, that's another $24,000, bringing my gain down to $57,082.41.
Let's add in another $1,200 per year for what I call the Bad Things Happen to Good People Expense. I need a new washer; I need a new dryer; the sewer main backed up into my house; those crazy kids tore up the lawn; insert your calamity of choice here that would require some sort of surcharge. The gain now drops to $21,082.41.
And God help me if I decide to remodel the kitchen.
Now, maybe that's too pessimistic. But I am not convinced that is the case. The way I see it, I'm basically looking at a gain of about $21,000 in rapidly inflating Yankee pesos when all is said and done. Yes, I'd have that equity of $346,089 banked. But when I add in the cost of the mortgage ($200 more per month), the taxes ($200 more per month) and the condo fees ($200 more per month), I am looking at spending $600 more per month for the privilege of ownership. That's $7,200 per year that I am not directly paying for now.
If I put $7,200 per year away for 30 years, and I make 3 pc per year on it, I end up with $350,518. That's roughly $4,429 more than I'd have if I bought the house. I have more faith in my ability to invest in the markets well than I do in my ability to buy property well.*
The real financial advantage, of course, to buying a place comes after year 30 -- when the stupid mortgage is paid off. My housing costs would drop precipitously in year 31, whereas if I didn't buy, I'd still have a rent payment. Which leads to the one flaw in my argument I readily concede -- my rent payments have to stay about where they are for this to work. Once the rent goes up, the equation changes dramatically.
If my landlord decides to raise my rent sharply, suddenly the idea of buying a house becomes much more amenable, because the $288,000 rent payment number goes through the roof. For instance, if my rent jumped to $1,100 tomorrow, I'm suddenly paying $396,000 in rent over those 30 years, giving me roughly fifty thousand good reasons to buy a house.
Loyal Rant Readers may argue that my landlord, just because he needs to make a profit on his investment, will eventually raise my rent over time, thus making my argument out of balance. This may be true. But since my landlord is the best landlord in New Hampshire, I'm not seeing any immediate reason to jump on the property ladder.
There are plenty of other reasons not to jump as well. Here's my favorite: I am single and I have no children. I don't need a house. For that matter, I don't need a condo. I mean, for Pete's sake, I don't even use all the space I have now. If I did, I would not refer to the back bedroom as the Back Bedroom I Do Not Use -- well, except for storing paperwork and books -- here on The Rant.
Not having a wife and children also means that my roots here are very thin. If -- God forbid -- Something Happened, there's nothing keeping me here in New Hampshire. (I would miss the Wolves games, yes, but would undoubtedly adjust to rooting for the AFL/af2/other indoor football team in my new city). If Something Happened here, I could be fully moved back to the Midwest within 45 days, if not sooner. The long and short of it is this: if Something Happened, I could cut myself free of my New Hampshire ties quickly and easily.
I like having that flexibility, and at this point in my life that's important to me. The ability to pick up stakes and move someplace else, should the situation require it, is an advantage that those with roots someplace don't really have. This to me is worth the offset of not having a "nicer" place -- particularly since my place is nice enough already, and will undoubtedly be so ... well, for a while, anyway!
* In the last five years, house prices in my area have gone up roughly 28 pc, according to OFHEO. The S&P 500, on the other hand, has gone up 31 pc.Posted by Benjamin Kepple at August 13, 2008 08:45 PM | TrackBack