What I think we ALL need to remember here is that we are in a FALLING market. The reason NOTHING cash flows is prices have risen at a rate that far outpaced rent increases. Think about it, did anyone here get a 200% pay raise at their jobs over the last 4 years? That’s how much MY home has appreciated in that time. The vast majority of Americans saw their REAL pay actually FALL. Anyone remember paying $1.50 for gas 3 years ago? When your income stays the same but the things you buy dramatically increase in price your taking a pay cut pal, whether you like it or not.
Right now in Southern New England you can rent a 3 bed 2 bath colonial, about 5 years old, in a great neighborhood, for about $1500 a month. To BUY that house it would cost you about $400,000, so let’s take a 10% down payment and go from there…
10% on $400,000 = $40,000 ( decent deposit for a family to save)
That leaves a balance or mortgage of $360,000 @ 7% for 30 years your payment is $2395/month
Add property taxes of about $300/month
and insurance of about $50/month and your total is…
$2745/month to buy the same house!!!
Now as a renter you have no maintainace costs, no property taxes and no insurance to pay. SO YOUR SPENDING 50% LESS renting vs. buying. And you still have your $40,000.
WHY WOULD ANYONE BUY???
My theory is we will see the price of homes drop until they revert to the mean, in other words, until they come inline with rents. This isn’t new thinking here, it’s what the ENTIRE real estate business is built on. People rent until they save enough money to buy because they end up with SLIGHTLY higher payments but own the property. The other way it can work is rents rise until people are spending as much to rent as buying would cost. THAT is not going to happen. The rental market is FLOODED with inventory, in my area rents are actually FALLING. There is so much to chose from tenants are MAKING OFFERS to landlords, AND THEY’RE BEING ACCEPTED!!!
None of this should surprise any of us. Property values rose to unsustainable levels because of absurdley low interest rates. When banks have to go back 40 YEARS to the last time rates where at those levels, something is wrong. If instead, rates had remained higher this BOOM (great word for it) would have been a gradual appreciation instead of a MANIA. And it WAS a mania, I had friends SLEEPING OUT on the front lawns of sales offices in Florida to buy pre-construction condo’s. They ALL still own 'em, and none of them are CLOSE to cash flowing but they can’t give them away so they own 'em.
This is going to get MUCH worse. I don’t think people realizes how bad things could actually become.
Nice article in AP today about the rental market in Florida. You can now rent a $300,000 home, brand new, never lived in, with a built in pool for…
Yea, that’s gonna turn around down there any day now. :banghead
It effects apt. buildings because potential tenants can now rent HOMES instead of apartments from landlords with NO experience who thought the gravy train would never end. They’ll take anyone with a check book and a heart beat because that “investment home” they bought is draining their savings every month and they owe the bank more than it’s now worth so they can’t sell it.