Why I Bought A Home Now After Renting For 12 Years

Why I Bought A Home Now After Renting For 12 Years

Realtor's Home Purchase Ensures That Chicago Home Prices Will Crash

On Friday, after renting for 12 years, my wife and I became homeowners for the 4th time. Obviously buying a home in Chicago was not a decision that we entered into lightly. When we first arrived in Chicago in 2000 we suffered from major sticker shock at the outlandish prices in this area - and home prices just kept going up. Then there was the oft repeated chorus from friends and colleagues that "Chicago home prices always go up", which was a major red flag.

On top of all that I'm a numbers guy and when I ran the numbers on this decision renting was consistently cheaper than buying. You know how people like to say that renting is throwing your money away? Bullshit. There's a cost to buying and there's a cost to renting and you just need to compare the two properly. Paying interest on a mortgage and property taxes is no different than paying rent.

The other big factor in our decision to rent was that I absolutely hate having to deal with physical assets:

  1. Physical assets - especially homes - are subject to entropy and that makes me nervous. While the rain assaults my house while I'm asleep every molecule of water will be looking for a way to get inside and destroy everything in its path.
  2. I really don't like having to deal with mundane problems like broken closet doors (entropy at work). I much prefer letting a landlord deal with them.
  3. If I need to leave the country on short notice because class warfare has just broken out my liquid assets follow me anywhere I go. Not so with a house. It will be confiscated by the Occupy movement.

But buying a home finally just got way too attractive.

Chicago Home Prices Are Really Low

According to the Case Shiller home price index for Chicago home prices on average have fallen almost 35% from the bubble peak and are tracking almost 27% below the long term trend line - pretty close to an all time low since the bubble burst. There is also a variety of evidence that Chicago's housing market is coming back and we think we were able to get a good deal on a short sale. Of course, now that we bought the market is sure to enter another free fall.

The Impact Of Low Interest Rates

Interest rates got stupid low, which actually had several implications. Obviously that means low mortgage rates. I was able to borrow at 2.875% on a 7 year ARM loan from Guaranteed Rate and 42% of my monthly payment will go towards principal reduction right out of the gate and the other 58% of the payment is tax deductible - for the time being. But low interest rates also meant that money I had sitting on the sidelines was earning zero interest in a money market fund so I might as well let it sit idle in a down payment.

With these low rates I also figured out that I could borrow money at zero interest in the short run rather than liquidate higher yielding investments. But one word of caution here. This "borrowing" technique is not recommended for the average person. It has way too many caveats and requirements.

Chicago Rents Are Rising

When you buy a house you lock in a monthly cost - except for any monthly assessments or property taxes - for as long as 30 years. However, rents will rise over time and that's exactly what's been happening in Chicago lately. In fact Chicago rents have risen 9.1% in the last year.

How The Math Worked Out For Us

Today we pay $3200/ month to rent a 2700 square foot (the developer included the garage and called it 3100) townhome in University Village - $38,400/ year. That rent is a bargain because we've been here for 9 or 10 years and our landlords have had no vacancies or problems collecting rent. But you can bet that in the long run our rent is going up.

Compare that to the 4300 square foot single family home in West Town that we just closed on and will cost us $700,000 after all the work is done. If we assume that the average cost of the money tied up in the home is 3% in the current environment then the cost of the money is $21,000 per year. Add in another $11,200 for property taxes (assuming I successfully appeal them) and the total comes out to $32,200 per year - all of which is tax deductible for the time being. Now there will also be annual maintenance but with all the work we are having done I'm hoping the maintenance won't be much for a while.

So it was pretty clear that we were looking at more home for less money. It was a no-brainer. You can do the same simple analysis for your own personal circumstances or you can get really sophisticated and use the NY Times rent vs. buy calculator, which takes into account additional factors like home price appreciation and rent increases. There is a good chance that you will see that buying trumps renting right now.

BTW, I also shorted a small amount of treasury bonds on Friday, thus ensuring that bonds will continue their rally. The last time I shorted treasuries that's exactly what happened and I lost my ass. Bonds are already up in early morning activity.

Comments

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  • I think its great you bought a house. I think it was a mistake to use an ARM. Isn't that how some people got in trouble around the bust?

    when is the house warming party?

  • :) I don't plan on being there in 7 years. Would like to retire into the southeast. Rates are definitely going up between now and then though so if you have a longer time horizon you should do a 30 year.

  • I wish you the best with your purchase and I hope that all things work out for you as far as the new house and your retirement sale.

    I'm a numbers guy myself and I just cannot shake the weariness of the Chicago market. Yes, prices have fallen. Yes, some indicators are pointing upwards. Yes, interest rates are currently great.
    I'm always looking at properties and I think my anxiety comes from the belief that we aren't actually looking at a correction in a market bubble but a whole downward economic shift. I don't like to be pessimistic but unemployment figures can be discounted because if real wages don't rise (keep up with inflation and taxes) there will be few people who will be able to afford to qualify, much less make the mandatory 20 percent down-payment on a home. Real wages haven't risen in years.
    Shadow inventories, tighter underwriting standards, high HOA fees, and the certainty that property taxes will be going up in Chicago, teachers and city employees will not be getting raises any time soon. I hope I'm wrong but I see more flight from Chicago as fiscal issues squeeze the homeowner out of the city and prices continue to drift down. I really hope I'm wrong.

  • In reply to Nijinsky:

    Thanks. Of everything you mention Chicago's fiscal situation is my biggest worry. These guys can not continue to tax and spend. They have to get it under control. I do worry about people leaving in droves but so far it hasn't happened and buyers are really stepping up to the plate right now.

    BTW, I don't focus on the unemployment rate but the employment numbers in the Chicago area. I actually track them in a graph in the middle of this page: http://blog.lucidrealty.com/chicago_real_estate_statistics/

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    I'd love to understand the details of how, even with a sub 3% interest rate, you bought a $700k house for $1750/month. Large down payment?

    I am finding that just about any reasonably sized 4 BR single family home in the Chicago area will run you about $3,000-$3,500 (taxes included) a month with a 30 year mortgage at a good interest rate. And you do want the 30 years mortgage, because the low rate is the only reason you can afford these prices.

    When interest rates are 7-9% in 7 years, nobody is going to be able to afford to pay what you paid for your house.

  • In reply to Joshua Vanderberg:

    Well, my interest rate is 2.875%. I rounded up to 3% and applied that cost to the entire purchase price = $21,000/ year. Yes, my actual mortgage payment is much larger than that but a good chunk of the mortgage payment is not a real cost, it's forced savings in the form of principal repayment.

    You do have to impute a real cost to your down payment because you could be doing something else with that money and that's why I applied the 3% to the entire purchase price.

    I did a 7 year ARM because I don't plan on living there more than 7 years. Yes, mortgage rates will be much higher in 7 years but historically higher rates have not impacted housing prices. You would think it would but it doesn't.

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    I understand - still, when comparing affordability, I think it's a bit odd to discount payments towards principal in the comparison.

    One might be able to afford a $3k/month rent, but not be able to afford a $4k/month mortgage, even though $2k/month is really 'forced savings', so the 'real' cost is only $2k/month. You might not have that money to save, or even if you do, you might not want it tied up in such an extremely illiquid investment.

  • In reply to Joshua Vanderberg:

    That's correct. From a cash flow perspective it can be challenging but it's not a real cost. I think something like 40% of my mortgage payment will be principal repayment. If you have the savings you could take the money out of savings to pay down the principal - but that may not be attractive.

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    Gary Lucido

    After 20 years in the corporate world and running an Internet company, Gary started Lucid Realty with his partner, Sari. The company provides full service, while discounting commissions for sellers and giving buyers rebates.

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