Tuesday, May 24, 2011

Why I rent? (And why I will eventually buy)

At no point in my life would it have been a good time to buy a house. Anything pre-2005 wasn't an option because I had yet to finish school and didn't have a job to support a house. Then in 2005, I got my first job and my first salary. Without going into details it wasn't a salary that I would want to make a house buying decision on. By 2006, I started getting a little bit of pressure from coworkers advising me to buy a house with the line that I was "throwing my money away" with rent. I remember even meeting with a real estate agent who approved me for a $300K loan. That was ridiculous at the time considering my salary, down payment and other factors.

In 2007, I started looking for a new a job and was able to look in places like Milwaukee, Columbus, and North Carolina. Eventually, I lucked into two offers from a company in North Carolina and my current company here in Minnesota. The fact that I had the other offer out there from the company in North Carolina helped me in my salary negotiations. If I had been locked into a house then I would have been forced to look for jobs in the Twin Cities area. This would have been a huge constraint, and probably would have meant I would have settled for a smaller salary.

In 2008, the economy soured and the stock market dropped 32%. Most of the money I had saved for a down payment was in the stock market, which means if I had bought a house I would have been selling at a low point. Since the end of 2008 the stock market has rebounded and is actually up 39% from that point. Selling stocks to buy a house would have been a terrible financial decision on that alone. Now combine that with the fact that home prices have continued to go down since 2008, then it is clear that this was not the year to buy a house.

In 2009, businesses started reacting to the poor economy. At my company they started a furlough program that cut my salary by a paycheck and a half. Because I was renting (and had a very inexpensive rent), I had been able to save up some money and was able to use that extra unpaid time off for vacations. I remember driving to Cleveland for a wedding, going to the College World Series and generally just having a great time that year. Would I still have had as much fun if I was worried about a mortgage? Probably not.

In 2010, I got married and started looking at finances from a joint perspective. Now, I could finally start looking at houses in terms of what we (as opposed to I) could afford. Having a 2nd salary and a 2nd savings made a huge difference in that analysis. Just like that the type of home I could afford increased. The new goal was to determine how M and I handled finances by looking at what we spent. This has been an ongoing process, but we now have 10 months of data that will help us make a more educated home buying decision. Getting that level of data was important, but 2010 was also the wrong time to buy a house because it was a great year for the stock market and another bad year in the housing market. Year over year the Minneapolis houses from 2010 to 2011 have gone down 11%. The money that would have been invested in a house was instead going up in the stock market. I am very pleased not to have bought a house in 2010.

Now it is 2011. Is it a smart time to buy? Maybe? Home prices might be ready for a rebound and there is no doubt that interest rates are low. M and I are in a good financial situation and we would be able to afford a reasonable home. However, we still choose to rent. Here are the reasons why:
  1. Flexibility: If M and I would like to move, then it is as easy as giving our landlord a 2 month notice. This gives me peace of mind if our job situation changes or if we decide to look at living somewhere else.
  2. Poor investment: The stock market can be very volatile. There can be declines like the ones experienced in 2008 and early 2009. I am well aware that there are risks involved, but the good news is that with the added risk comes more expected reward. At a relatively young age, I can take on the added risk and feel safe that the market will continue to grow at an average rate that is larger than the housing market.
  3. Maintenance: I'm not much of a handy man, so the idea of fixing things around the house doesn't appeal to me. If something breaks at our duplex, then I call the landlord and he sends someone to fix it.
  4. Location: M and I live in a part of the Twin Cities that we probably couldn't afford if we were going to buy. The modest house across the street from us is going for $500K. There is an extremely nice duplex about 6 houses over that is going for $1.3M. The condos that are a block away from us go for $1.2M and have an association fee of $803 and taxes of $13,809 a year. It is too bad that we wouldn't be able to afford the area, because we really like where we live. There are shops, restaurants, a grocery store and a small movie theater all within walking distance of our place. It is going to be really tough leaving our neighborhood because of the convenience it gives us on a daily basis.
Those are the main reasons why I like to rent at this point in my life. However, M and I will eventually buy and here are the reasons why?
  1. Kids: I would like my kids to grow up in a place they can confidently call their home. Maybe it wouldn't matter to them if they were in a place we rented or bought? However, it would matter to me and I am pretty sure it would matter to M. Also, this fits into point two.
  2. Socially Acceptable: Buying a home is something adults do. The real estate agents of America have forced that propaganda down our throats enough times, that most people believe it. Not many people want to go against the social norms in fear of being ostracized. M and I are the same way, and even if renting always made more logical sense, it still doesn't mean we wouldn't eventually buy. 
  3. Neighborhood: Our street is the renter's street. The street (Maple) running perpendicular to us is the the buyer's street. There are some major differences between the two streets. Maple Street is a filled with two above-average children per house playing in perfectly manicured lawns. The lights are brighter and the people seem to be friendlier. When I look at Maple Street I get jealous and hopeful that one day I will live on a street like that.
  4. Customization of the house: I don't want to knock any walls down, but it would be nice to at least have that as an option. Also, I wonder if ownership of a house will make me think differently about where I live. Will I care more about where the couches are placed compared to the TV? Will I hang up more of my favorite pictures?
  5. What else is there to do with the money? This might sound bad, but really do I always want to put money into my checking, savings and stock accounts? Eventually it would be nice to put the money to use. While stocks probably will be a better investment than a home, you can't live in stocks. 
A home hasn't been the best option for me in the past, and I don't think it is something we should do in the present. However, in the future I think that a owning a home will have some advantages. 


Jenny said...

Good points. I am more the person to throw myself into things (take that shocked look off your face, Mister) and today I look back and wonder if we should have bought the house we live in now, or waited. For us, buying when we did made sense, and we would have eventually bought pre-2008 no matter what. So actually we saved some money buy buying a little smaller house a little earlier. That being said, with two kids and two salaries, we're about to purchase a second home and rent out this one because we can't afford to sell. I never thought I'd be a landlord, but being one, I'm so glad there are so many good reasons to rent. =)

jk said...

Consider this: REO levels/trends in your area. Many believe that we'll see a 2nd downturn in values after the REO gets to a pt it has to be sold & the mkt has more houses for sale than buyers.

Mary said...

Nice post. I like our place, and agree the cost and flexibility are nice. But I am very much looking forward to owning a home that is ours.