30 March 2011

Buying a house in a depreciating market

TLDR: This calculator is surprisingly accurate for a first time buyer: NYT Rent vs Buy Calculator

First time homebuyer here. Been ready - nearly - to buy for a few years now but the combination of "WTF is with the housing market" and a shaky economy has left me thinking it's a bad idea. Granted, this was sort of a vague feeling of unease -- not a decision I looked at super closely.

Here it is a few years later and the economy is getting better. Slowly. In fact so slowly that it looks unlikely that we'll get back to full employment before the next recession. Nevertheless, my career is doing fine and demand for my skill set is strong. I feel that now might finally be time to buy.

However, I really want to be objective as possible about it. This is money we're talking about here and it's a good idea to keep your money and emotions far apart.

To that end, I decided to do some math.

First, house payments are partially interest payments and partially principal payments. So that's some money that goes to the bank and some that goes to you. Then there's PMI, house insurance and property taxes.

Here's the big negative: depreciation. In my market, we're looking at almost $17,000 per year for depreciation according to Case Schiller values.

You may say: "But what about the emotional satisfaction of owning a home?" Sure. Then there's the weekends spent re-caulking the bathtub and kitchen sink. Houses can be a spare time sink. I surely love my spare time. Allows me to write more in my blog (can't you tell?!). I consider the emotional benefit of owning a home to be offset by the emotional cost of having less time to watch Jersey Shore. That's a joke.

In the benefits column, we have: tax savings, principal payments and... well that's it. Not paying rent anymore? Sure, but you're paying the ITI in PITI so that washes out quickly.

Now for the math: the total "not going in my pocket" costs per year are the sum of: PMI, Homeowner Insurance, Property Taxes, Depreciation and Interest -- I'll call these Costs. The "going in my pocket" amount is the sum of tax savings and principal payments -- I'll call these Credits. For me, buying a $225k property at 5.25% with 3% down means my total outlay (Costs minus Credits) would be about $8k. Well that's much much less than I'm paying in rent ($9.5k / year for an apartment that certainly isn't the same as a decent house). OK so buying a house looks like a no-brainer: I'm coming out about $100 a month ahead.

Wait, not so fast. That's in a static (not appreciating or depreciating) market. Factor in depreciation as it stands currently (about 7%) and my total outlay per year bumps up to $23k. Granted, a huge chunk of that is solely depreciation. But why pay depreciation unless you're already in a house? This is the same reason people walk away from mortgages. Depreciation is just moving the goal line -- the goal line of you owning your house outright.

It seems unlikely that the market will depreciate for years though. When would be the optimal time to buy? When the total outlay per month is the same as the rent on a similar house. The way I calculate it, that's when depreciation is heading toward positive territory but still negative -- above -4% to be exact. If you're comfortable living in a smaller apt instead of a larger house, that number moves to -2%.

Play around with this Buy vs Rent calculator on the NYT website and  you'll see that when the market is depreciating still it will take you about 20 years for buying to be better than renting. Yikes.

In the meantime -- while I'm looking for the market to improve enough that I won't be underwater on the house in a year, evaporating my down payment -- I think I'll hang around the foreclosure market and see if anything pops.

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