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Ask Money

Rent–Or Buy?

Chris Farrell Aug 8, 2008

Question: My husband is 52 and I am 51. He works and I retired in 07 taking my pension in a lump sum which I now take small amount from each month. Husband earns $73,000/yr and stows away 20% in his 401k. He has a chronic degenerative disease which will necessitate him going on disability within the next 5-7 years. A substantial amount of his income goes toward his medical copays, Dr, visits and massive amounts of prescriptions. We sold our SoCal home in December 07 and feel fortunate to have lost just $1,000 on it. With prices continuing to slide, we now rent a home, but rent costs us much more each month than what our former mortgage payment was. I put the $154,000 equity from the sale of the home into CD’s and savings for the short term. We can easily find a nice home for $250,000. by putting down our $154,000, we would then have money left each month to spend on other things like traveling, which my husband won’t be able to do in the future after he can no longer work. When he does quit working, we will move back closer to family in the upper midwest. What is your opinion on buying in a SoCal market which is still falling; or should we find a more affordable apartment and pay to store our furniture and save some money? Even the nicer apartments rent for higher rates than what a mortgage payment would be. We have no debt of any kind and excellent credit scores. M. Yucaipa, CA.

Answer: Bloomberg recently ran an article suggesting that California could be the first state to hit bottom. “California led the U.S. into the worst housing recession since the 1930s,” write reporters Dan Levy and Daniel Taub. “Now the most populous state may be the first to find the bottom.” Sales are picking up, with about 40% of sales foreclosed homes. In the article, Mark Zandi, chief economist at Moody’s Economy.com, estimates that nearly $1.3 trillion of homeowner equity was lost in California since home prices peaked in December, 2005. California is having a wrenching decline in wealth, but this is a cathartic event that will lay the foundation for a recovery,'' says Zandi.This signals the beginning of the end.”

It’s a good article and Zandi is smart. He knows real estate and credit markets. Still, the downward pressure on home prices doesn’t seem to be letting up, and it could still get a lot worse, especially when option ARMs come due later this year and next in California. Even the Bloomberg article expects home price discounts of up to 50% will extend into 2010.

Rather than trying to predict the direction of the real estate market, what struck me in your note was that your husband won’t be able to travel in the future. He faces a disability. I say “buy” if owning a home frees up cash flow to travel and do things together while you can. So what if you buy too early and miss bottom? You’ll be accumulating experiences and memories while you can. Assuming you’re right on the finances and quality of life, I think you already know the answer to your question.

When you look to buy I’d focus on homes that are designed for ease of use when your husband is disabled. In other words, everything should probably be on one floor, with wide doorways (in case he needs a wheelchair), a shower without a lip (again in of a wheelchair or walker), and other so-called “universal design” features that are geared toward making it easier to age in place and deal with a disability.

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