By Chelsea P. Gladden
It’s no secret that the longstanding American dream of home ownership has suddenly become a nightmare. People who were approved for loans they couldn’t afford have lost their homes and their thousands and thousands put down for deposits. In an effort to correct the process, a loan is nearly impossible to secure these days. However, more and more people are realizing that for once, it’s actually a better financial decision to rent versus own.
Prices Are Still Dropping
Home sales continue to plummet, with a record low recorded in November, as reported by The National Association of Realtors (the previous low was March 2008). Buyers that were fortunate enough to even be approved to purchase a new home have already watched their investment dwindle. It’s hard to time the market, but with prices continuing to drop, evidence of a reversal is hardly in sight. Even if potential homeowners have the patience for their investment to turn around, they may want to use that patience to wait to purchase.
Monthly Out of Pocket Considerably Less
Consider “John†in San Diego. He purchased a beach close property with a loan that washed up a $6000 a month mortgage. If he were to rent the exact same home, he’d be paying $2500 per month at best, with his $75,000 down payment still in the bank. Even with a tax write off, he loses money monthly to live in a home that he could actually save money in if he were renting. If he wanted to sell the home he bought in 2005 for $845K, in the current market, he would lose anywhere from $100,000 to $200,000 on his initial investment due to the drop in value!
A couple in Orange County purchased an attached 1000 square foot town home in 2004 for $308K with the hopes of eventually using it for rental income. Two kids later, they have outgrown the home, but can’t afford to take the loss it would now cost them to rent it out because it wouldn’t come close to covering their mortgage payment on it. Like many couples, they are considering walking away from the home altogether in order to rent a bigger home with a yard at a much less out of pocket rate.
Outside Costs Covered By Landlord
To top off the savings for rent versus a mortgage alone, most landlords cover the cost of water, trash, gardening and repairs. If John’s refrigerator were to break or a pipe were to burst, all costs would fall to the landlord. Home maintenance alone potentially saves renters additional thousands a year.
Sure someday the value homes will turn around, but that’s not helping John sleep better in his today as he throws away $3500 a month on top of losing $200K in value.
So buyers beware. It may behoove you to continue to save for the down payment for your dream home. Watch your money grow while the prices of homes continue to drop. (For now!)
Photo Credit: Eugenia Beecher | morgueFile
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Further Reading
Tags: American Dream, mortgage, National Association of Realtors, Orange County California, Owner-occupier, Renting, San Diego
