You Should Rent Instead of Own a Home
One of the headlines in yesterday’s USA Today read, “Foreclosures take biggest dive in years in November.” That would make you think things are getting better in the rent vs. buy arena. When you read the story, you realize things are just taking a breather and about ready to get worse. Why does the mainstream media feel it has to spin stories to make the economy look better than reality? I think this is a blatantly dishonest headline. Why do I say that? In the body of the USA Today story it says, “Part of the decline was seasonal. Foreclosure activity slows around Thanksgiving. But some of it stemmed from delays that lenders and mortgage servicers imposed after reports surfaced in September that their employees or contractors signed, and in some cases backdated, documents claiming knowledge of facts about mortgages that they did not know.”
Former Congressman Alan Grayson said, just two months ago, it was much more than backdated documents and sloppy paperwork. He said it was “foreclosure fraud” on a large scale. (Click here to watch Grayson’s entire video for yourself.) Why doesn’t the newspaper dig deeper and report the truth? Maybe USA Today would not want to make its many banking advertisers angry. (That’s just my opinion and a guess on my part.) The story goes on to report, “Mortgage servicers and lenders, meanwhile, are pressing ahead to resume stalled foreclosures. November’s lull will be followed by a bulge of cases later, says Lawrence Yun, chief economist with the National Association of Realtors. The pace of foreclosures will return to more normal levels in the second quarter of 2011, says Rick Sharga, RealtyTrac senior vice president.” (Click here to read the entire USA Today story.)
Why didn’t the headline read “After November Lull, Foreclosures set to Explode”? Don’t expect the mainstream media to give it to you straight. This is one of the many reasons Patrick Killelea started his real estate website called Patrick.net. He is a hotshot San Francisco based computer programmer and analyst by trade, but became a self-proclaimed “real estate bubble blogger” in 2004. He could not get the math to work out to justify buying a home in the Bay Area. (That must be the “analyst” in him.) He booted up his site, started to warn people there was a big bubble blowing in real estate and predicted prices could fall by 50%. Up until the bubble burst, many people thought he was nuts. Of course, we all know now he’s “crazy like a fox!” History has proven him spot on. His site (Patrick.net) gets more than 20,000 visitors a day. Recently, he put out another warning–telling people to rent and hold off buying. If you thought now is the time to buy real estate, you better wait and read this excellent article below first. –Greg Hunter—
It’s a Terrible Time to Buy an Expensive House— 10 Reasons Why?
By Patrick Killelea Guest Writer for Greg Hunter’s USAWatchdog.com
- Because house prices will keep falling in the areas where prices are still dangerously high compared to incomes and rents. Banks say a safe mortgage is a maximum of 3 times the buyer’s annual income with 20% down payment. Landlords say a safe price is a maximum of 15 times the house’s annual rent. Yet in affluent areas on the coasts, both those safety rules are still being violated and there is still a huge housing bubble. Buyers are still borrowing 6 times their income and putting only 3% down, and sellers are still asking 30 times annual rent, even after recent price declines. Renting is a cash business that proves what people can really pay based on their salary, not how much they can borrow. Salaries and rents prove that those high prices will keep falling for a long time. Anyone who bought a “bargain” in those areas last year is already sitting on a very painful loss. On the other hand, housing prices in cheaper areas have now fallen well below the cost of renting. In some housing markets, gross rents exceed 10% of the price of a house. It does makes sense to buy in those places now. Housing prices could still fall more if unemployment rises or interest rates go up, but on a month-to-month basis, the buyer of a very cheap house wins. So the housing market is split.
- Because it’s often still much cheaper to rent than to own the same size and quality house, in the same school district. On affluent areas, annual rents are 2.5% of purchase price while mortgage rates are 5%, so it costs twice as much to borrow the money as it does to borrow the house. Renters win and owners lose! Worse, total owner costs including taxes, maintenance, and insurance come to about 9% of purchase price, which is more than three times the cost of renting and wipes out any income tax benefit. Buying a house is still a very bad deal in those neighborhoods, but it does now make sense to buy in some neighborhoods where prices have already fallen into line with salaries and rents, or even below. Check whether you should rent or buy in your own area with “What’s It Really Worth?”The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s safe to buy for yourself because then rent could cover the mortgage and all expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:annual rent / purchase price = 3% means do not buyannual rent / purchase price = 6% means borderlineannual rent / purchase price = 9% means ok to buySo for example, it’s borderline to pay $200,000 for a house that would cost you $1,000 per month to rent. That’s $12,000 per year in rent. If you buy it with a 6% mortgage, that’s $12,000 per year in interest instead, so it works out about the same. Owners can pay interest with pre-tax money, but that benefit gets wiped out by the eternal debts of repairs and property tax, equalizing things. It is foolish to pay $400,000 for that same house, because renting it would cost only half as much per year, and renters are completely safe from falling housing prices.To see the rent vs buy numbers for a specific house and change the assumptions used, try this calculator.
- Because it’s a terrible time to buy when interest rates are low, like now. House prices rose as interest rates fell, and house prices will fall if interest rates rise without a strong increase in jobs, because a fixed monthly payment covers a smaller mortgage at a higher interest rate. Since interest rates have nowhere to go but up, prices have nowhere to go but down. The way to win the game is to have cash on hand to buy outright at a low price when others cannot borrow very much because of high interest rates. Then you get a low price, and you get capital appreciation caused by future interest rate declines. To buy an expensive house at a time of low interest rates and high prices like now is a mistake. It is far better to pay a low price with a high interest rate than a high price with a low interest rate, even if the mortgage payment is the same either way. o A low price lets you pay it all off instead of being a debt-slave for the rest of your life. o As interest rates fall, real estate prices gerenerally rise. o Your property taxes will be lower with a low purchase price. o Paying a high price now may trap you “under water”, meaning you’ll have a mortgage debt larger than the value of the house. Then you will not be able to refinance because then you’ll have no equity, and will not be able to sell without a loss. Even if you get a long-term fixed rate mortgage, when rates inevitably go up the value of your property will go down. Paying a low price minimizes your damage.4. Because buyers already borrowed too much money and cannot pay it back. They spent it on houses that are now worth less than the loans. This means most banks are actually bankrupt. But since the banks have friends in Washington, they get special treatment that you do not. The Federal Reserve prints up bales of new money to buy worthless mortgages from the most irresponsible banks, slowing down the buyer-friendly deflation in housing prices and socializing bank losses.Big bank cash flow will never run out as long as the Federal Reserve exists. The Fed exists to protect big banks from the free market, at your expense. Banks get to keep any profits they make, but bank losses just get passed on to you as extra cost added on to the price of a house, when the Fed prints up money and buys their bad mortgages. If the Fed did not prevent the free market from working, you would be able to buy a house much more cheaply.As if that were not enough corruption, Congress authorized vast amounts of TARP bailout cash taken from taxpayers, to be loaned directly to the worst-run banks, those that already gambled on mortgages and lost. The Fed and Congress are letting the banks “extend and pretend” that their mortgage loans will get paid back.
It is necessary that YOU be forced deeply into debt, and therefore forced into slavery, for the banks to make a profit. If you pay a low price for a house and manage to avoid debt, the banks lose control over you. Unacceptable to them. It’s all a filthy battle for control over your labor. This is why you will never hear the president or anyone else in power say that we need lower house prices. They always talk about “affordability” but what they always mean is debt-slavery.
5. Because buyers used too much leverage. Leverage means using debt to amplify gain. Most people forget that debt amplifies losses as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or a mortgage rate adjustment, he lost 100% in the real world.
The simple fact is that the renter – if willing and able to save his money – can buy a house outright in half the time that a conventional buyer can pay off a mortgage. Interest generally accounts for more than half of the cost of a house. The saver/renter not only pays no interest, he also gets interest on his savings, even if just a little. Leveraged housing appreciation, usually presented as the “secret” to wealth, cannot be counted on, and can just as easily work against the buyer. In fact, that leverage is the danger that got current buyers into trouble.
The higher-end housing market is now set up for a huge fall in prices, since there is no more fake paper equity from the sale of a previously overvalued property and because the market for securitized jumbo loans is dead. Without that fake equity, most people don’t have the money needed for a down payment on an expensive house. It takes a very long time indeed to save up for a 20% downpayment when you’re still making mortgage payments on an underwater house.
It’s worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is kept unfairly high because of the Realtor® lobby’s corruption of US legislators. On a $300,000 house, 6% is $18,000 lost even if housing prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
6. Because the housing bubble was not driven by supply and demand. There is huge supply because of overbuilding, and there is less demand now that the baby boomers are retiring and selling. Prices in the bubble, even now, are entirely a function of how much the banks are willing and able to lend. Most people will borrow as much as they possibly can, amounts that are completely disconnected from their salaries or from the rental value of the property. Banks have been willing to accommodate crazy borrowers because banker control of the US government means that banks do not yet have to acknowledge their losses, or can push losses onto taxpayers through government housing agencies like the FHA.
7. Because there is a massive and growing backlog of latent foreclosures. Millions of owners have simply stopped paying their mortgages, and the banks are doing nothing about it, letting the owner live in the house for free. If a bank forecloses and takes possession of a house, that means the bank is responsible for property taxes and maintenance. Banks don’t like those costs. If a bank then sells the foreclosure at current prices, the bank has to admit a loss on the loan. Banks like that cost even less. So there is a tsunami of foreclosures on the way that the banks are ignoring, for now. To prevent a justified foreclosure is also to prevent a deserving family from buying that house at a low price. Right now, those foreclosures will wash over the landscape, decimating prices, and benefiting millions of families which will be able to buy a house without a suicidal level of debt, and maybe without any debt at all!
8. Because first-time buyers have all been ruthlessly exploited and the supply of new victims is very low. From The Herald: “We were all corrupted by the housing boom, to some extent. People talked endlessly about how their houses were earning more than they did, never asking where all this free money was coming from. Well the truth is that it was being stolen from the next generation. Houses price increases don’t produce wealth, they merely transfer it from the young to the old – from the coming generation of families who have to burden themselves with colossal debts if they want to own, to the baby boomers who are about to retire and live on the cash they make when they downsize.”
House price inflation has been very unfair to new families, especially those with children. It is foolish for them to buy at current high prices, yet government leaders never talk about how lower house prices are good for American families, instead preferring to sacrifice the young and poor to benefit the old and rich, and to make sure bankers have plenty of debt to earn interest on. Your debt is their wealth. Every “affordability” program drives prices higher by pushing buyers deeper into debt. Increased debt is not affordability, it’s just pushing the reckoning into the future. To really help Americans, Fannie Mae and Freddie Mac and the FHA should be completely eliminated. Even more important is eliminating the mortgage-interest deduction, which costs the government $400 billion per year in tax revenue. The mortgage interest deduction directly harms all buyers by keeping prices higher than they would otherwise be, costing buyers more in extra purchase cost than they save on taxes. The $8,000 buyer tax credit cost each buyer in Massachusetts an extra $39,000 in purchase price. Buyers should be rioting in the streets, demanding an end to all mortgage subsidies. Canada and Australia have no mortgage-interest deduction for owner-occupied housing. It can be done.
The government pretends to be interested in affordable housing, but now that housing is becoming truly affordable via falling prices, they want to stop it? Their actions speak louder than their words.
9. Because boomers are retiring. There are 70 million Americans born between 1945-1960. One-third has zero retirement savings. The oldest are 64. The only money they have is equity in a house, so they must sell. This will add yet another flood of houses to the market, driving prices down even more.
10. Because there is a huge glut of empty new houses. Builders are being forced to drop prices even faster than owners, because builders must sell to keep their business going. They need the money now. Builders have huge excess inventory that they cannot sell at current prices, and more houses are completed each day, making the housing slump worse.
Patrick Killelea started his site (Patrick.net) in 2004. Killelea did it because he wanted home buyers to understand the market and not get ripped off. Killelea is a computer programmer and analyst by trade. He has worked for Sun, Charles Schwab, Wells Fargo, Motorola and Amazon. He has appeared on the ABC-TV show “Nightline” and has been quoted in the Wall Street Journal for his real estate insights and correct calls on housing. Patrick says he’s “A liberal who wants socialism. I say that just to piss off all the people who love labels too much, but there is some truth to it. Liberalism is a wonderful thing! Everyone should be a liberal. You know what “liber” means in Latin? FREE.” BTW, Killelea is an Irish surname, originally Mac Giolla Leigh or Mac Giolla Leith in Irish. Killelea says, “Many people ask me if it’s Hawaiian.” (Check out his site Patrick.net by clicking here.)