A pall has settled over the housing market. The latest piece of bad news: Residential real estate prices fell sharply in January. The S&P/Case-Shiller 20-city index dropped by 3.1% from the same period a year ago. It’s the biggest year-over-year decline since December, 2009. The economic recovery isn’t reaching the home market.
The downward pressure on home prices won’t let up anytime soon. You won’t get much of an argument with that outlook at neighborhood gatherings where homeowners swap sorry tales of underwater mortgages and bleak sales. There are too many homes in foreclosure and too many buyers sitting on the sidelines waiting for even lower prices.
Still, at some point prices will bottom out. Here are my main guidelines for weighing the costs and benefits of homeownership:
Compare the cost of owning vs. renting.
Buy only if the deal is financially conservative
Keep the financing simple
Smaller is both smart and socially sustainable
Online calculators will help you do the math. There are a number of good ones, but I tend to gravitate toward dinkytown.net and hsh.com. These calculators, while good, are all of the “quick glance” variety. It’s rule of thumb number-crunching.
The home-related section of Dinkytown.net is mostly made up of mortgage calculators. What’s the difference if I take out a 15 year or a 30 year mortgage? How about an ARM vs. a fixed rate mortgage? Should I pay points? It also offers a decent rent vs. buy calculator. The emphasis is on when will the investment in a home break even compared to renting. It’s an important exercise.
Of course, with these calculators you have to make assumptions about future inflation rates, home equity appreciation, how much you expect to make on savings if the money doesn’t go into a down payment, and the like.
Still, it’s intriguing to note that when I ran the numbers on buying a two-bedroom condo in my neighborhood vs. keeping my two-bedroom rental in 2009 the breakeven point on ownership was more than 11 years. The numbers clearly favored renting over owning. But a comparable look this morning has the breakeven point at less than 5 years. The pendulum is definitely moving toward owning.
The big advantage of HSH.com is it’s a comprehensive mortgage and refinancing website. I like its mortgage calculators, such as private mortgage insurance. Here is its rent vs. buy calculator. What I particularly like about the site is that you can also look at its homebuying, refinancing, and other housing and mortgage related consumer information. It offers sound advice.
These are two calculators I frequently consult when I am working on stories on the housing market. Are there home buying calculators you like better? Let us know.
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