Hey people, if you haven’t noticed, we are experiencing a housing bubble: skyrocketing rents, zero inventory, and astronomical offers in terms of both volume and price. This is not the time to buy. Back away, people. Back away! I’m completely flabbergasted at how many people have decided that THIS is the time to buy. Very odd. Don’t get me wrong, I’m in the hunt myself, but I’m not paying up for a shack. I’d rather stick to our 1-bedroom, thank you very much. I have zero pressure to buy.
A coworker said that NOW is the time to buy into a new condo development because the price just keeps going up and up. And I’m like, dude, that is not sustainable. Use your brain! I asked him what the monthly HOAs are and he said $450. What a joke. Seriously, these people deserve to go into foreclosure for making such dumb mistakes.
Let’s do the math with an example.
37 years old – because that’s how old I am
$700,000 purchase price for a nice 2-bedroom condo in San Francisco
25% down – because these days that’s how much you have to put down to compete
30 year loan at a 3.5% interest rate – which is generous for rates right now
Mortgage + 1.14% property taxes + $450 HOAs = $3,425 housing expense per month – that doesn’t even include electricity, water, garbage, cable
Imagine still paying $3,425 at 65 years old? Because I’d still have another 2 more years to go. I don’t want to be coughing up that much money in my twilight years. I want to be on the beach in Central America drinking raw coconut water and eating shrimp.
I have this ongoing debate with my mom because she is a firm believer in owning a home. She’s one of those old school types. I questioned why should we be shackled to such a high mortgage 30 years from now when we can easily rent a 2-bedroom in a podunk suburb for peanuts. She countered that once your home’s paid off, the only expenses left are utilities and property taxes (which I should add are insane if you live in San Francisco). I don’t know. I’m still not sold on this home ownership dream. But since my parents are, it’s good to know we can always move in with mom and dad!
$3,425 / month. Decrease by the tax deduction of interest (avg $346/mo over the life of the mortgage, higher in the beginning assuming 35% tax rate). Decrease by the tax deduction of property tax ($233/mo).
Of the $2,846 / month left, $1,369 / month on average goes into principle (lower in the beginning), effectively like forced savings.
This leaves the average monthly ‘throwaway’ payments at $1,477. Assuming you can afford to make the forced savings every month, given inflation and long-term appreciation of rents and home prices, this is not very much money to pay per month for housing for 30+ years
Certainly, maintenance, depreciation, and future tax law changes will impact these numbers, but I just want to point out that the effective cost calculation isn’t so straightforward and probably is less than stated
Jason, thanks for the reminder. Your calculations definitely make sense. What do you think of this calculator http://www.nytimes.com/interactive/business/buy-rent-calculator.html. If I plug in similar numbers:
1700 which is our rent
700k home price
25% down
3.5% mortgage rate
1.14% property taxes
Buying is never better than renting after 30 years.
Have always wondered how reliable these calculators are.