Rent vs. Own

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I used to think that renting is throwing away your money too. I used to rent a place for $1200/month. But after becoming more knowledgeable about financing, I realized that owning is like throwing away your money to interest, property tax, and HOA fees. Fortunately, I currently live with my girlfriend who only pays $1400/month for her owned condo. Point is, we understand the need to get a bigger place in a couple of years. And we would prefer to buy a bigger place. But if the numbers aren't comparable, we wouldn't mind renting a bigger place either. I thinking renting is great if owning is too expensive. I think owning is better if the payment is manageable - not only is your housing costs fixed, but there's opportunity for appreciation in the long run.



I have a friend who makes 160K a year, but still lives with his parents. He only pays them $600/month. He definitely intends to buy soon, but "renting" from his parents for $600/month is dirt cheap compared to owning his own place for at least 3-4K/month.
 
Renting is more flexible, you are not stuck to one location in case you have to move for your job. Plus, you tend to spend more money when you buy a house, old or new. For a new house, you have to spend money for window treatments, landscaping, insurance, HOA, Mello Roos, property tax, new furnitures. I have saved a lot of money by not pulling the trigger in the past 4 years, which I have almost attempted many times. I think I saved $100K on Sage, QH, $300K-$500K on MilleFleur Woodburry, $200K-$300K on Alexandria, CG, $400K-$500K on Westbourne, CG, $300K-$500K on Ciara, CG.
 
[quote author="irvine_home_owner" date=1220971972]I think the other underlying thing here is that I read posts that look down at buying and usually use claims that the homes in Irvine are going to lose up to 50% of their peak value. I can see that older homes that had a lower base will certainly lose lots of that equity but I'm not too sure that the new homes bought within the last 5 years will drop by 50%. I have a hard time believing a house that sold for brand new in 2004 for 1.2mil is going to be $600k in the next 2 or 3 years. My memory may be fuzzy but I don't recall Orange County homes in good areas that sold new in the late 80s dropping by 50% by the mid 90s.



I thought the reason people buy in Irvine and why prices are higher is because this area tends to be less prone to real estate devaluation.... but it's also the reason why rent is so high in this city. If we were having this same conversation in Santa Ana (where that 50% thread is primarily based), I could understand the bearishness more... I'm just not too sure how accurate these forecasts are in this area.



Again... I am not opposed to seeing the upside of renting... I just prefer a more balanced discussion.</blockquote>


It is difficult to imagine home prices dropping 50%, unless you understand the yardstick of fundamental valuations by which prices are measured. In the last two boom cycles prices ran up then returned to fundamental valuations based on income and rent. It will do so again. It is difficult to imagine houses being bid up in price to double their fundamental valuations, but it occurred. Prices didn't drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals.



Resale prices and rents are higher in Irvine because the community is a more desirable place to live. People believed prices could not fall in better areas like Irvine or Newport Beach, so they bid prices up even higher. Many of these high end areas will fall particularly hard because the prices are even more detached from fundamental valuations. The belief that prices cannot fall is one of the false assurances of bubble mentality. It leads to even greater losses.



The forecast for price declines so far have been more conservative than the reality. You can believe them or not, but the track record is pretty good.



When thinking about "throwing your money away on rent" consider that houses have both a consumptive value and an investment value. You are throwing you money away on consumptive value whether you rent or own. Of you own, you are spending on interest which is merely renting money from the bank. Even with the tax savings, the cost of ownership greatly exceeds the cost of rental. The investment value of real estate right now is very negative because prices are falling and they will continue to do so. It makes no sense to overpay for consumptive value and lose money on the investment. Only when the cost of ownership for consumptive value is less than the cost of renting will it make sense to own. At that point prices will bottom, and there will be postive investment value as well.



For the next few years, to own is to lose money. If the emotional benefits of ownership are worth that price, then you should own. Don't underestimate the financial price you are paying because it is pretty high. Personally, I am going to continue to put off satisfying the emotional need to own in order to save a great deal of money, and so are many others on this board.
 
[quote author="irvine_home_owner" date=1220997318]I guess what I'm looking for is more reasons to rent because if so many of you are doing it... and the market is in flux right now.... it might be better than "move-up" buying right now.



We want to move to a larger place... the home we currently own is nice but we want to live in a newer home. It seems that renting something like that will cost about $5-6k a month which does save money off of financing a similar home but it's hard to get over that stigma of paying that much money towards property that we don't own. So I'm looking for more reasons to get us over that.



<span style="color: red;">CalGal: Is the home you are renting exactly the same size as the one you were going to buy? Your cost savings are rather significant and you seem to be targeting a similar type of house that I'm looking for in Irvine.</blockquote></span>

The house we are renting has one less bedroom and it has a community pool rather than a personal pool. It also only has two garages versus three. Although the house we are renting has a spectacular view of the golf course with mountains in the background, which I think makes up for the less bedroom.



We actually got a great deal on our rent. We are paying significantly less than market value. The landlords were trying to sell this house for months without any luck. We happened to tell the realtor that we would be interested in renting the house if they decided to take it off the market. We low-balled them with a rental price and included a nice letter, and they accepted our offer after a few counter offers. The landlords have owned this house for many years, so they are still making a profit on our rental amount.



It seems like it's working out for both parties involved.



Irvine_Home_Owner, don't get me wrong, I would LOVE to own a place again. I miss having my own house, even my husband misses it. We do invest sweat equity into the house we are renting, but not as much as we would if we owned the house. I'm counting the days until we own again. We also didn't buy because we were nervous about the economy and our job situation. We are in sales, and companies tend to cut the sales force in difficult times. Renting gives us the flexibility to pick up and move in 30 days if needed.
 
<blockquote>Prices didn?t drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals. </blockquote>


It did drop 25-30% for brand new homes in Laguna Niguel/Mission Viejo.
 
[quote author="IrvineRenter" date=1221004531][quote author="irvine_home_owner" date=1220971972]I think the other underlying thing here is that I read posts that look down at buying and usually use claims that the homes in Irvine are going to lose up to 50% of their peak value. I can see that older homes that had a lower base will certainly lose lots of that equity but I'm not too sure that the new homes bought within the last 5 years will drop by 50%. I have a hard time believing a house that sold for brand new in 2004 for 1.2mil is going to be $600k in the next 2 or 3 years. My memory may be fuzzy but I don't recall Orange County homes in good areas that sold new in the late 80s dropping by 50% by the mid 90s.



I thought the reason people buy in Irvine and why prices are higher is because this area tends to be less prone to real estate devaluation.... but it's also the reason why rent is so high in this city. If we were having this same conversation in Santa Ana (where that 50% thread is primarily based), I could understand the bearishness more... I'm just not too sure how accurate these forecasts are in this area.



Again... I am not opposed to seeing the upside of renting... I just prefer a more balanced discussion.</blockquote>


It is difficult to imagine home prices dropping 50%, unless you understand the yardstick of fundamental valuations by which prices are measured. In the last two boom cycles prices ran up then returned to fundamental valuations based on income and rent. It will do so again. It is difficult to imagine houses being bid up in price to double their fundamental valuations, but it occurred. Prices didn't drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals.



Resale prices and rents are higher in Irvine because the community is a more desirable place to live. People believed prices could not fall in better areas like Irvine or Newport Beach, so they bid prices up even higher. Many of these high end areas will fall particularly hard because the prices are even more detached from fundamental valuations. The belief that prices cannot fall is one of the false assurances of bubble mentality. It leads to even greater losses.



The forecast for price declines so far have been more conservative than the reality. You can believe them or not, but the track record is pretty good.



When thinking about "throwing your money away on rent" consider that houses have both a consumptive value and an investment value. You are throwing you money away on consumptive value whether you rent or own. Of you own, you are spending on interest which is merely renting money from the bank. Even with the tax savings, the cost of ownership greatly exceeds the cost of rental. The investment value of real estate right now is very negative because prices are falling and they will continue to do so. It makes no sense to overpay for consumptive value and lose money on the investment. Only when the cost of ownership for consumptive value is less than the cost of renting will it make sense to own. At that point prices will bottom, and there will be postive investment value as well.



For the next few years, to own is to lose money. If the emotional benefits of ownership are worth that price, then you should own. Don't underestimate the financial price you are paying because it is pretty high. Personally, I am going to continue to put off satisfying the emotional need to own in order to save a great deal of money, and so are many others on this board.</blockquote>
IR, when do you predict that prices will approach bottom? 2011-2012 when all of the Option ARM and Adjustable ARM loans reset?
 
[quote author="usctrojanman29" date=1221008085][quote author="IrvineRenter" date=1221004531][quote author="irvine_home_owner" date=1220971972]I think the other underlying thing here is that I read posts that look down at buying and usually use claims that the homes in Irvine are going to lose up to 50% of their peak value. I can see that older homes that had a lower base will certainly lose lots of that equity but I'm not too sure that the new homes bought within the last 5 years will drop by 50%. I have a hard time believing a house that sold for brand new in 2004 for 1.2mil is going to be $600k in the next 2 or 3 years. My memory may be fuzzy but I don't recall Orange County homes in good areas that sold new in the late 80s dropping by 50% by the mid 90s.



I thought the reason people buy in Irvine and why prices are higher is because this area tends to be less prone to real estate devaluation.... but it's also the reason why rent is so high in this city. If we were having this same conversation in Santa Ana (where that 50% thread is primarily based), I could understand the bearishness more... I'm just not too sure how accurate these forecasts are in this area.



Again... I am not opposed to seeing the upside of renting... I just prefer a more balanced discussion.</blockquote>


It is difficult to imagine home prices dropping 50%, unless you understand the yardstick of fundamental valuations by which prices are measured. In the last two boom cycles prices ran up then returned to fundamental valuations based on income and rent. It will do so again. It is difficult to imagine houses being bid up in price to double their fundamental valuations, but it occurred. Prices didn't drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals.



Resale prices and rents are higher in Irvine because the community is a more desirable place to live. People believed prices could not fall in better areas like Irvine or Newport Beach, so they bid prices up even higher. Many of these high end areas will fall particularly hard because the prices are even more detached from fundamental valuations. The belief that prices cannot fall is one of the false assurances of bubble mentality. It leads to even greater losses.



The forecast for price declines so far have been more conservative than the reality. You can believe them or not, but the track record is pretty good.



When thinking about "throwing your money away on rent" consider that houses have both a consumptive value and an investment value. You are throwing you money away on consumptive value whether you rent or own. Of you own, you are spending on interest which is merely renting money from the bank. Even with the tax savings, the cost of ownership greatly exceeds the cost of rental. The investment value of real estate right now is very negative because prices are falling and they will continue to do so. It makes no sense to overpay for consumptive value and lose money on the investment. Only when the cost of ownership for consumptive value is less than the cost of renting will it make sense to own. At that point prices will bottom, and there will be postive investment value as well.



For the next few years, to own is to lose money. If the emotional benefits of ownership are worth that price, then you should own. Don't underestimate the financial price you are paying because it is pretty high. Personally, I am going to continue to put off satisfying the emotional need to own in order to save a great deal of money, and so are many others on this board.</blockquote>
IR, when do you predict that prices will approach bottom? 2011-2012 when all of the Option ARM and Adjustable ARM loans reset?</blockquote>


His prdictions are in the analysis section. Another way to look at it is to look at previous cycles of approximately 6 years, so 2012 is a good guess.
 
[quote author="WestparkRenter" date=1221006516]<blockquote>Prices didn?t drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals. </blockquote>


It did drop 25-30% for brand new homes in Laguna Niguel/Mission Viejo.</blockquote>
Price drops were signficant in many areas (including Irvine) in the 90s... but not 50%.



Like others... I would think I could weather a 30% drop knowing that in 10 years that should rebound but 50% just seems a very high number. Again... this is on newer homes... the older homes that started off at almost of 1/3rd of their peak value I expect to drop although I think they will eventually rebound too.



CalGal's example seems to be more the exception than the rule because if I could live in a $1mil house for sub $3k rent... I would probably become a renter too.



This is a very good discussion for me as many of you are well-informed and are making a huge amount of sense compared to the other posts in different threads that amount to "Don't throw your money away" without going into the whys. Maybe those posters had already explained why many times previously and are just shortcutting it so I appreciate the time you guys are taking in explaining the reasons.
 
I say just pick out a home you like. Go through the numbers. Be sure to also add in a nominal amount of depreciation, say 10-12% (low estimate) for the next year and maybe 5-7% for the next 1-2 years.



I'm sure the numbers will be more in favor or renting, and of course it gets even worse when you try to give yourself a 5-10% cushion for purchase. Anyways good luck

-bix
 
I think that the problem is you are using your experience of the 90s as a basis for projecting outcomes.



In the 90s, the high end (75% case-schiller) became about 50% inflated above fundamentals, and to correct it dropped ~30%.



In the 00s, ....................................................................125% inflated, so to correct, it should have to drop 50-60%.



That is just to meet price: income or price: rent fundamentals. Of course, it could overshoot transiently also.



You can bet all you want against returning to fundamental value buy purchasing a home now.



Let us know how that works out.



(and btw, I would really like to own a home, rather than rent. But I also really cannot afford that luxury of losing my downpayment and more)
 
[quote author="freedomCM" date=1221017782]I think that the problem is you are using your experience of the 90s as a basis for projecting outcomes.



In the 90s, the high end (75% case-schiller) became about 50% inflated above fundamentals, and to correct it dropped ~30%.



In the 00s, ....................................................................125% inflated, so to correct, it should have to drop 50-60%.

</blockquote>
I understand this... but there are more factors than pure math going on here... which seems to be more relevant in certain areas of the country.

<blockquote>

(and btw, I would really like to own a home, rather than rent. But I also really cannot afford that luxury of losing my downpayment and more)</blockquote>
So if you weren't going to lose your down... why would you rather own than rent?
 
[quote author="irvine_home_owner" date=1221008824][quote author="WestparkRenter" date=1221006516]<blockquote>Prices didn?t drop that much in the early 90s because prices were not bid up quite so high relative to fundamentals. </blockquote>


It did drop 25-30% for brand new homes in Laguna Niguel/Mission Viejo.</blockquote>
Price drops were signficant in many areas (including Irvine) in the 90s... but not 50%.



Like others... I would think I could weather a 30% drop knowing that in 10 years that should rebound but 50% just seems a very high number. Again... this is on newer homes... the older homes that started off at almost of 1/3rd of their peak value I expect to drop although I think they will eventually rebound too.



CalGal's example seems to be more the exception than the rule because if I could live in a $1mil house for sub $3k rent... I would probably become a renter too.



This is a very good discussion for me as many of you are well-informed and are making a huge amount of sense compared to the other posts in different threads that amount to "Don't throw your money away" without going into the whys. Maybe those posters had already explained why many times previously and are just shortcutting it so I appreciate the time you guys are taking in explaining the reasons.</blockquote>


You're already own a home so technically you can trade up. It does not matter if it goes up/down because your house will go up or down with it.

But for somebody who does not own a home and is looking for a point of entry, 30% on a $1M($300K) is a lot of money to loose. It's very hard to pay off $300K. For perspective, my family bought a house in OC(1970s) for $69K, it took them nearly 25 years to pay it all off. One of the house that I own, I only paid off $100K after 10 years of living in it(and I aggressively paid off my mortgage whenever I refinanced). I laughed when a realtor in Irvine told me not to worry about the $30K difference because it only costs $30/month, but they never mentioned how long would it take me to pay off the $30K.



By the way, I've talked to a lot of people who are born/raised in OC, they told me when they retire they have to move out of OC, to Arizona for example, because it's cheaper there, ie their houses will not be paid off by the time they retire( eventhough they can afford the house now). Are you planning to pay off your house? It's another angle to consider.
 
When I turn 70 I will purchase a real expensive house with a 30 years fixed loan and interest only for the first 10 years.
 
[quote author="bkshopr" date=1221024707]When I turn 70 I will purchase a real expensive house with a 30 years fixed loan and interest only for the first 10 years.</blockquote>


At the top of the next bubble, I will start taking out HELOCs at 100% LTV. Why risk missing the top of the market when you can "put" it to the bank?
 
[quote author="irvine_home_owner" date=1221024297][

<blockquote>

(and btw, I would really like to own a home, rather than rent. But I also really cannot afford that luxury of losing my downpayment and more)</blockquote>
So if you weren't going to lose your down... why would you rather own than rent?</blockquote>




I would like to own for many of the reasons most people cite, stability, customization, more space, better parking, big yard where I can grow fruit and veggies...etc.





but since I rent, buying now would likely result in a huge financial hit, more than I can afford to trade for quality of life. Plus, my QOL is pretty good as a renter a couple blocks from the beach. I would like more yard and parking, but not at the price of my DP fund.
 
[quote author="freedomCM" date=1221036886][quote author="irvine_home_owner" date=1221024297][

<blockquote>

(and btw, I would really like to own a home, rather than rent. But I also really cannot afford that luxury of losing my downpayment and more)</blockquote>
So if you weren't going to lose your down... why would you rather own than rent?</blockquote>




I would like to own for many of the reasons most people cite, stability, customization, more space, better parking, big yard where I can grow fruit and veggies...etc.





but since I rent, buying now would likely result in a huge financial hit, more than I can afford to trade for quality of life. Plus, my QOL is pretty good as a renter a couple blocks from the beach. I would like more yard and parking, but not at the price of my DP fund.</blockquote>


Not to hijack the thread, but I think your avatar is in escrow freedom.
 
heh, I was just looking at those fairhaven houses a few hours ago on Redfin. It is in escrow! But there are more where that one came from...



Unfortunately for me, the turnover of these homes in orange and CM/NPB has been quite low, so not many of them sold during the bubble. That means that few of them will have to sell in distress over the next couple of years.



I may have to settle for less than my dream house.
 
Hey, I know a lot of kids in their early 20's who cannot even afford to rent - they still live with family.

Then I know others who are in their late 20's who can afford to rent, but are to cheap to do so - they still live with family.



Renting is a lot more affordable than owning right now. But even then, many can't even afford (or is too cheap) to rent.

I know than many on this blog can easily own or rent. But there are many people in the OC who can't do either without some financial strain.



PRICES NEED TO DROP FURTHER...
 
Is rent that much higher in Irvine than it was 10, 15 or 20 years ago?



I saw some chart on this site but specifically in Irvine.... what did a 2br rent for in 1988 compared to 2008? I don't think the difference is that significant factoring in inflation and higher wages.



I understand now why this favors renting because the cost difference in owning is much much higher now than even just 10 years ago.



I would probably rent now too... but I would work to buy once I found something I liked and could afford. I don't think that renting today is unaffordable... especially if you can cost-share that burden (get roommates!).
 
In 1987-1988 time frame, it was less than $700 per month for 1 BR aparment near Westpark, Veneto is the street.



I found the plan, $ Price $1,555 - $1,625

<a href="http://www.rental-living.com/Communities/San-Marco-Villa/Prices-And-Floorplans/Floorplan/Plan-A/">http://www.rental-living.com/Communities/San-Marco-Villa/Prices-And-Floorplans/Floorplan/Plan-A/</a>



But here is some frame of reference:

In 1984/1985, I could get a brand new SFR starter home in Northwood/Trabuco Canyon area for less than 4 times my salary, maybe 3.5 times my salary alone.
 
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