Tuesday, April 13, 2010
Buying a house
My blog covers a wide range of topics. Often, economics is one field I poke around. This post is inspired by a conversation with my coworkers about a week ago. They suggest I purchase a house in the current market/economy. At the moment, my job is not secure at Spansion due to Chapter 11 bankruptcy, but that may change over the next few months. It is uncertain. Putting that aside, I am going to discuss why someone should NOT purchase a house at this time. My coworkers were correct in the past sense. I should build equity in a house. Yes, I am throwing away money in rent. Those statements are true in the Austin home market until the recent housing bubble (yes there is one in Austin) and the current state of employment within Austin. It is not wise to currently buy a house.
First, it is a false statement saying that buying a house is a little more than paying rent. Bull. The breakdown below will show you why. These are approximations.
Renting a 2 bed 1 bath apartment per month in Austin, TX:
Base rent = $900
Renters insurance = $50
Utilities = $100
Upkeep = $0
Total = $1050
The average home price in Austin is $187, 000 according to the Austin Chamber of Commerce. This is low compared to many places like California and Florida, but it is quite a bit higher than surrounding areas. Using a mortgage calculator and the average home price to get the monthly mortgage payment after a 10 % down payment at 5% interest.
Buying an average priced home in Austin, TX per month costs:
Base mortgage + Mortgage insurance + Tax = $1395
Homeowners insurance = $100
Utilities = $150
Upkeep = $200
Interest tax break = -$125
Total = $1720
Note folks, this is a 63 % payment increase over just renting alone. This does not even take into consideration the down payment of $18,700 and the extra fees of paying escrow along with a realtor (6% commission). In reality, it is about 73 % more expensive to buy a house. It is not a slightly higher cost to buy a house in comparison to renting an apartment.
This is part 1 of 2 posts that makes the simple point of purchasing a house is not slightly more than renting an apartment. The next post, part 2, will discuss why one should wait to buy a house a couple of years from now.
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While I would agree that in your situation... buying a house does not make sense, there can be situations where it does.
ReplyDeleteIn my case, I bought slightly before my wedding, but in buying a Duplex I was buying something that would make financial sense even if I was unmarried, and even if I was not living there. (i.e. I moved away and decided to rent it out.)
In my case, I was paying $950/mo in rent, whereas my 1st mortgage, 2nd mortgage, and taxes added up to $1435/mo... All very close to your numbers.
The main difference in my case was having the other half of the duplex that I rented out... So I got $800/mo in rent which turns your $1720/mo into $920/mo for me to live in my half of the duplex. Thus, excluding down payment costs, I was immediately lowering my cost of living.
Having a grad student in the back bedroom only served to lower my cost of living further, so that I could buy solar panels. :-)
Lasso, in my next post. I am going to discuss why in the past is was worth the effort to buy the house. Also, the post will discuss why it was good to buy a house pre-bubble days. Your case will support my argument. What I am arguing against is why NOW is a bad time to buy a house. The prices are too high and a lack of jobs will not support the current high prices.
ReplyDeleteI'm not sure where you are getting those numbers.
ReplyDeleteYour mortgage costs are way too high. I bought a house with 0% down at 5% APR and another 120k in purchase price and the total cost is $1500/mo with all the extras.
Danny, I am including taxes and estimated upkeep in the mortgage price. My $1700/mo is not far from your $1500/mo.
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