Note: This post was pulled over from another site where I used to blog and has been reproduced here. Originally posted online on September 10, 2003.
In one of my previous journal entries, Liora made a comment that I’ve been meaning to reply to for a while. She said, “The interest rates pretty much mandate it such that renting is just dumb. Rent is throwing money away.”
This is absolutely true for most of the country. It’s absolutely NOT true for the Bay Area (hence the alternate title.)
Before we go on, I should mention a few things:
1) I rent;
2) I believe that housing prices in the Bay Area will drop about 10% (or perhaps more) in the next 3-5 years.
Why? Read on.
I just signed a 1-year lease for a 2BR/1.5BA condo for $1475 a month. This is the reason why I leased. (Note: link now dead.)
That is a link to a similar condo in Pacifica… a 2BR/1.5 bath, just like I have, and of the same vintage (built in 1972). They are asking $342,500 for it. This means that with a $68,500 down payment, I’d have to pay $1675 a month to own it.
Stop and think about this for a minute. Supposedly, the whole point of owning is that you aren’t “throwing your money away” (i.e. a mortgage payment should be cheaper than renting the equivalent property), but I could put $70,000 down on this condo and have nothing to show for it except a larger mortgage payment than I would pay in rent. A housing price devaluation of 10% or more could completely wipe out any equity that I would have in the house after only a year or so of owning it. As many people learned with the stock market, it’s extremely dangerous to always count on your investments to go up (like many people assumed both now with housing and in 1998-1999 with the stock market.) A lot of wealth was completely wiped out in 2000-2001 with the stock market devaluation. Imagine what any housing price devaluation will do to people who have saved up $50,000 or more to make a down payment, only to watch their equity disappear as housing prices face the same adjustment the stock market did.
Why will housing prices drop? To put it bluntly, they have to. Renting cannot forever be cheaper than owning, or people who buy investment properties will be out of work. People cannot afford to keep bleeding cash on investment properties like they are now. Plus, once interest rates go back up, those first-time home buyers who have been saturating the home-buying market right now will no longer be interested in buying. Thus, housing demand will drop, supply will keep going up (as builders keep building new houses and condos), and prices on houses will start to fall. And they will fall more than most people will expect. I’m forecasting an overall drop of 10%. It could be more, or it could take 5 years to hit 10%. But it will happen. This will wipe out a lot of equity for a LOT of people.
Renting vs. owning is a huge sticking point for me. I would love to own property. I could probably afford to own property in the Midwest. And I probably would own at this point if I lived in the Midwest. But in the Bay Area, it’s not justifiable to own when you look at the numbers.
I’d rather take $68,500 and invest it into my company… that way, whatever return I get on it is directly influenced by me and how well I do sales. I know I can take that $68,500, put it into Simpli, and turn it into a revenue generator of $10,000 a month or more. There is no way I could do the same thing with a house. And that is why I rent.