Wednesday, May 4, 2011

Housing during times of Crisis: Buy or Rent?

Mr. Aguirre,
Your book was very insight full and eye opening. Thank you very much for sharing your experiences and hard earned knowledge.  I fear America is heading down the same road and a similar, if not worse outcome.
I do have a question for you. Is it better to rent or have a mortgage to own your home with the possibility of a collapses looming?  Additionally what happened to the ability to get a mortgage after the collapse? How long did it take for normal financing to return or has it?
My situation is that I live in South Florida and real estate prices are really low. We are currently renting and looking to buy.  We interested in a 1 acre, 3br 2 bath property in a semi-rural area. The price of 125,000 is low and the payments for the mortgage, taxes, & insurance are about the same as renting.
I tried not to bog you down with too many details as your time is valuable. If you have any questions for me please let me know. I’m very interested in your thoughts and experience.

Hi James, Thanks for your email, I’m glad you liked my book.
About mortgages, there weren’t much available before the crisis. The lack of trust in the country was already there and part of the existing problem, so you just didn’t find any reasonable house loans. The joke in Argentina was and still is, only those that don’t need a loan can get one. Meaning, only people with enough capital and properties so as to pretty much guarantee zero risk get loans worth anything. If that’s not you then the loan you got was small and with a terrible interest rate.

Only in the last couple years did some home mortgages start being offered again, mostly from the state owned banks. These are promoted by the president in public appearances with all the bells as whistles but when you look at them they are small with terrible interest rates, and the ones that are better (or sometimes when they give houses away for free with our tax money) it ends up spread among those in power. I remember one case where houses where being given away to the “poor”, the Mayor’s sister, his nephew, his brother, the guy had like 5 family members given a house to each. When the reporters went to investigate with the cameras they found out these houses (meant for the “poor”) where in fact being rented to the poor, but owned by the politicians friends and family. The Mayor’s explanation? “I come from a poor family myself!”
Regarding your question about renting or getting into a mortgage, it will really depend on your situation and the deal you come by.

If you happen to be very certain of the place you want to live in, and the house is priced right, why not buy? Worse thing that could happen is that the currency devaluates and you pay on dollars that are worth less each passing month. Don’t be surprised if that happens and an “adjustment” is made to save the banksters. In any case it may not be as bad, and even if that happens you’ll just be making a bit less of a deal in the purchase.

Another question you should ask yourself: If inflation goes up 30% in the next couple years, can I still make the payments each month? That’s how people lost their homes here. They were doing fine until everything started going up in price and before they knew they had 50% or 100% inflation to be dealt with, but with the same income.
What you want to avoid during times like these is buying thinking of selling in a year or two if you don’t like the place, or if you already decided to leave in a few years. With the way things are now, it’s too much of a gamble and you’re better off renting. If you nail a two year contract and the contract itself lacks an inflation adjustment note, then you’d be living cheap for as long as the allocation contract lasts. In Argentina even though supposedly not legal most rent contracts have such readjustment.

Keep in mind that while renting, the problems of the property you live in are not yours and that brings peace of mind. So you don’t own the place, but then again that means you don’t have to worry either if the house´s plumbing has to be redone right in the middle of recession when hardly a buck is coming in. Renting does have its advantages.

Of course in your place you can make long term plans, invest in it, grow a garden, plant trees, make safety upgrades. If renting it may be worth the time asking if your landlord is interested in making his place more secure. Maybe splitting costs, or have him pay for some of it would still allow you to make such improvements cheaply, things like better locks, window security films, etc.
Sounds like you have a good house in mind. If you’re sure about not moving and going into the selling market any time soon just go for it. The price sure does sound right.
One thing you may want to keep in mind is one of the previous posts about not living in a place that is too isolated. Not only because of crime, but the general lack of help being accessed within a reasonable amount of time is something to be avoided.

“If I live a gas tank away from anyone I’m much safer than in any town!” Yes, you’re also dead if you need immediate medical attention of any kind, reducing your life expectancy considerably and yet nothing guarantees that criminals won’t show up if the word of your nice setup gets around.
Keep some of these things in mind, but go for it if you are sure.
Take care,
Join the forum discussion on this post


Anonymous said...

This is a tough question to answer because the only true answer is "it depends." It depends on a lot of things - where you live, what kind of job you have, might you need to move in the next 5 years, etc..

In some areas of the U.S., house prices are still going down, and will keep sliding down as the foreclosures come on the market and the banks 'get real' with their prices. There are other areas where the monthly cost of a mortgage is already equal to the cost of rent. Add into this equation the individual factors - like job stability and whether or not you might need to move in the near future - and the result is 'it depends.'

If you may need to be mobile in your career and/or there are a lot of foreclosures coming to the market in your area, then renting seems to be the better choice.

If you have a steady and permanent career in your location and buying is nearly the equivalent of renting (dollar wise) then buying seems the better choice (assuming the neighborhood/ schools etc... are acceptable).

One thing about buying vs. renting that many people do not consider is the cost of maintenance. HVAC systems have to be replaced periodically. As do major appliances, roofing, interior and exterior paint, carpet, water heaters, and etc... It adds up.

A couple good rules of thumb: never pay rent in excess of 25% of your monthly income. Never purchase a house that cost 2.5X your annual income.

K said...

Buy a house so that a big bank can use document fraud and perjury to steal it by suing you in court. And if they don't steal it, maybe they can have the state steal it for them by eminant domain, just by promising to pay more property tax than you do.

One possible option to get affordable housing legally is to become a care-taker of a property that the owner wants to protect it from scavengers and squatters. Squating would be quicker to do, though more nerve-wracking.

Anonymous said...

I think that if you know you will have an income and a stable job, the house meets some of the needs we discuss on this blog, and you can get a fixed low mortgage, go for it. You will probably be paying the mortgage with increasingly inflated and worthless dollars.

JMHO. There ARE upkeep expenses but you keep buying a little piece of the land/house from the banksters with every payment and you can deduct the mortgage interest.


David said...

Right now rents are rising as people are avoiding purchasing, punishing renters.

In 2002 Bob Prechter published his book, "Conquer the Crash" and argued that housing was due for a massive fall. He was one bubble too early, but it was good advice; those who bought between his book's publication and the top in housing are getting financially slaughtered.

His current advice: Housing has a LONG way to fall still.

One paradox of finance: If "Everyone" expects it, it won't happen. Today everyone expects Inflation, Inflation, Inflation.

What if they're wrong? Owing a lot of money in a deflationary environment is financial suicide.

You make the choice.

John Galt said...

One advantage an affordable mortgage is if it is a fixed rate, the cost of the mortgage will not go up while rent will.

hsu said...

I believe that Ferfal owns his house. That says a lot, right there.

The biggest red flag I see is the "semi-rural" location.

That's one of the big things that Ferfal rails against.

Jobs are not in semi-rural areas. Neither are supermarkets, drugstores, fire stations, or police stations.

So the key question is, how rural is "semi-rural"? If you are merely a 10-15 minute walk to several stores, one of which is a supermarket, then that's fine. But if it would take you 40-45 minutes to walk to the nearest decent supermarket, then you should probably reassess the location.

K said...

This is how banks steal houses-;cbsCarousel

Anonymous said...

A thought to remember: $25K down, 20% of the purchase price at $125K plus closing costs (another $8K?) will be money gone for good if housing crashes.

As for Prechter, he's been wrong for so many years it's time for him to be right (even blind squirrels find a nut now and then). I read his book. Junk. I promptly listed it on Amazon used and it was already flooded with used copies.

Prechter, like his buddy Jim Puplava, has been wrong, wrong, wrong. These guys, like Kiyosaki (Rich Dad, Poor Dad, Big Idiot), are shameless self-promoters who talk a good game, get you to invest with them, and then lose your money. I know people have have lost HUNDREDS OF THOUSANDS with those dillweeds handling their money. No thanks.

Consider hedging your bets. Some Real Estate, some precious metals, some offshore money (like Switzerland, Goldmoney, PSLV, CEF), some cash, and make sure you have income, income, income to support yourself. Have a backup plan for everything.

In the end, remember to enjoy life too! Good luck!

FerFAL said...

"Prechter, like his buddy Jim Puplava, has been wrong, wrong, wrong. These guys, like Kiyosaki (Rich Dad, Poor Dad, Big Idiot), are shameless self-promoters who talk a good game, get you to invest with them, and then lose your money. I know people have have lost HUNDREDS OF THOUSANDS with those dillweeds handling their money. No thanks."
Indeed, theses guys make money by selling the idea of getting rich, that's how THEY get rich. If they were such masterminds they'd be in their offices instead managing business. Rich Dad actually got cought on spy cam upselling stuff in his seminars worth thousands of dollars. Not happy about facing the camera about it.
Good post. Wanna make money? sell people the dream of 1)getting rich, 2)getting thin and 3)growing hair 4)Finding happyness. Those four are the biggest money makers.

K said...

John T. Reed has an extinsive list of Kiyosaki's underhanded activities. A small sample of those activities are advocating tax fraud, lieing, and bad faith negotiating.

His "Real Estate B.S. Artist Detection Checklist" is also worth looking at.

Doug From Oz said...

Good to see you're wise to the truth about Kiyosaki, Ferfal. The "wealth creation" crowd over here in Australia goes wild for him. A few years back you'd see fliers for his latest seminar stuck in the various Richdad books at the chain bookstores every time he'd come out here to spruik his latest rehashed title. I used to stick little printed slips in with "For more great info on Robert Kiyosaki, "(evil chuckle) This bloke is his Nemesis.

David said...

To anon, the main recommendation Prechter has made for the past 15 years is "sit in T-bills."

T-bills have outperformed every asset class except gold/silver the past 10-12 years, and right now I'm laughing at the late-comers on silver. They, too may now succumb because the internal parallels to the 1980 top are legion.

No one knows the future. All we know is when things are cheap and when they're expensive. Right now essentially "everything" is expensive.

Only fools trade (speculate) on someone else's analysis, and getting rich takes a lifetime of patience, not a "big move" in the market.

I come to this blog because sometimes there's an interesting comment or topic. The notion that Mr. Aguierre is omniscient (read some of these comments for such fawning praise) is kind of funny, all the funnier when the blog veers into discussions of macroeconomics and finance.

FerFAL said...

Hi David, never said I knew everything, quite sure I never said nor implied it. But the thing is, you always go on and on about deflation, ok its your opinion and we all have one, but you keep insisting deflation will come even if we're already seeing inflation all over the place, and it keeps getting worse!

About Prechter, Puplava,and specially Kiyosaki, dont get mad with people when they call BS on these charlatans.

Why even bring up Bob Prechter and his book, "Conquer the Crash" ?
The guy couldn't be more wrong even if he tried. The cover of his 2002 book says "You Can Survive and Prosper in a Deflationary Depression" For the next 10 years all we saw was the exact oposite of deflation.

Never claimed to know the first thing about finances, all the advice I've given regarding this was based on my experience and what has happened, not supositions of mine or predicitons. Since something simialr was occuring in USA I've been telling people two things since 2002: a) Precious metals are the best way to protect your savings 2) Expect inflation. To those that bought gold and silver in 2002 becuase of my advice, I dare say they did pretty well.
You think my blog is funny, I think its funny to say there's deflation when thre reality shows there's inflation, not deflation. Its good that we all have such a terrific sense of humor. :-)

hsu said...

David, you really should do more research.

Here's TNX vs SPY, or in English, the 10 year T-bill vs the S&P500 over the last decade.

Notice how the T-bill has lost 40% in the last decade while the S&P500 has made about 5%.

Anonymous said...

Hi David, I am anon.

I got in to silver with at least one hand at $4/ounce and gold at $300. I'll give myself some credit for selling my stocks in 1999 (and being ridiculed at work so hard I could never re-enter the faculty cafeteria... only one co-worker who lost $600K apologized to me a year or two later) and moving my assets to the PMs. I told not only my co-workers but my friends. Those that listened did well. Last year one co-worker revealed that he was telling everyone at work I was a know-nothing financial asshole, but apologized to me and said I "must be sitting pretty now". I guess so, whatever that means.

Mr. Kiyosaki claims to have gotten into silver at $3 10 years ago (huh?) and having recommended as much to his listeners. (really?)

Now, on to T-Bills. T-Bills are a FAIR investment for protecting cash/capital. Fair, not great. I avoided buying a single one and rather, sold all of my gov't obligations and have recommended others to do the same, despite Prechter's advice. As Richard Russell said in a caption below a photo of him and Prechter a few months ago: "Here's Bob Prechter, still trying to get his indicators to work".

Think about this, SeƱor Dave: T-Bills are like playing Vegas; THE HOUSE ALWAYS WINS. If the gov't were losing money on T-Bills (thus you would be net gaining) the Gov't would go out of business which, in the US' case it'll do regardless due to excessive spending on other ventures (war on terror/poverty/pork/etc.). In the meantime you tie up your capital with the government and allowing them to use it, you are to be a GUARANTEED LOSER in the long run as the government has too much overhead (interest and other expenses) to stay ahead of the principal. The government doesn't "make anything" so it's just a shell game of buying time and shuffling money with the interest being paid by domestic and foreign "investors" who get paid back some small rate which may be at or near a CPI which is always a fraud. If you think the gov't publishes honest employment/inflation numbers try John Williams' "Shadowstats" website. Think about it, think about it, you will lose your nest egg over time with T-Bills.

When Prechter was writing 10-15 years ago you could get fuel oil for just over a buck a gallon, gasoline in the high dollar range, home and car insurance much cheaper, food extremely cheaper, electricity cheaper, water cheaper and so on. Most things you need to survive have gotten more expensive. No, I won't suck Prechter's wang and try to convince myself otherwise. As long as toolsheds such as HeliBen Bernanke and Alan the Helmet Greenspawn, Timmy Toolboy Geithner, etc. are at helm, expect FRN printing and thus, monetary inflation which, as good Austrians, we know inflation is ALWAYS a monetary phenomenon.

Thanks for the nod, FerFAL.

Maldek said...

Hot topic we have here. Very well written FerFal!

To the original question I would suggest to buy the house if you can get a decent loan and *IF* your income will allow you to pay off the mortgage with price +50% from today but same income!
(Please read again, and calculate carefully)

Unlike Europe, guys in the US have a MASSIVE advantage with mortgages. In EU-land my advice would be to stay away from any debt, sell NOW and get rid off debt NOW!

Why is this?
In the US a mortage goes on the house. If you cant pay your monthly or your house looses value you can simply walk away. Banks take all risks.

In europe the mortgage goes on the house PLUS your person PLUS your wife/family.
What does that mean?
If your house looses value the bank can foreclose. If the house sale is not enough to cover debt and all costs you still owe this money to the bank. Bank will then take your car, your pay check and even your parents/wifes house (sometimes) to cover. Nice eh?