A decent bit of advice for homebuyers in this N.Y. Times article, 7 tips for first-timers:
http://www.nytimes.com/2009/09/12/your-money/mortgages/12money.html
“Mr. Stearns estimates that owners of a newer home that do some work for themselves but contract major work out to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it’s an older home.”
“So if you own a $400,000 home, your costs will probably hit the five figures each year — and may rise with inflation. These expenses will be another 20 percent or so higher if you live in a severe weather area. He does note, however, that the tax benefits of home ownership can offset half or more of these costs in some areas of the country.”
Jim, Here’s your hero Yun arguing for tax dollars to continue to prop up the bubble. This guy is the definition of pathetic and disgraceful in my opinion. For punishment they should convict him along with anther respectable real estate hero Ange Mozilo and let them spend eternity in the same cell. .
http://bubblemeter.blogspot.com/2009/09/lawrence-yun-speaks.html
The CBO is recommending to limit mortgage interest deductions. I hope everyone is lobbying heavily to prevent this happening. What really concerns me is that if that happens it will fundamentally change this to a country of landlords and tenant more like Europe, because the tax benefits will favor rental properties. At a minimum the changes should apply to both rentals and sole ownership.
I thought the tax benefits were what made owning a home better than renting? Also is your time worth nothing if you own a house? Dealing with contractors is a PITA. If you decide to do the work yourself is your time worth nothing?
I’m all for purchasing a home but owners need to be realistic. If Renting costs roughly the same as owning when you factor in the maintenance costs is it worth buying? Mortgages factor the interest up front. If the house you’ve purchased loses value or stays even and you’re forced to sell what’s the benefit after factoring in Realtor costs?
I just see a lot of rose colored glasses being worn by those pumping ownership. Usually it’s because the people wearing them earn their income from buying and selling real estate.
Fortunately Jim usually sees through all the bs and gives honest answers.
I agree with the point that people don’t factor in maintenance. We had our 40+ year old heater go 2 years ago. We’ve had the older washer/dryer/fridge/dishwasher all die over time in the last few years. We’re budgeting for a new driveway (tree roots cracked ours) and new house paint – because those need to happen.
It has to be part of the calculations.
Good advice in the article. If I was a mortgage company, I would offer applicants a points reduction in exchange for attending a 8-16hr financial education course on the costs of home ownership (and if I was the government, I would make it a requirement to obtain a gvnt backed loan). You can test their knowledge.
Shadash – in the long run, Rent vs. Mortgage costs should assume a steady ratio as investors require a risk adjusted return on their investment and renters refuse to pay excessive rates (vs. buying). The problem is that owners make investments based on long-term expectations, and when the rules change (i.e.: deductions allowed), then their investment value can fluctuate unexpectedly. Another analogy is that inflation isn’t bad (in fact, it’s good)–It’s bad when the rate of inflation is not what the market expected, which is why the Fed spends a lot of time trying to manage the target rate.
25 year old house, 25k a year
10 year old house 10k a year
Thats my rule of thumb. Not including remodeling. This is just functional upkeep including painting.
Frisbee,
I don’t know if I agree with you.
1. You’re statement “inflation isn’t bad (in fact, it’s good)–” is in my opinion completely wrong. Inflation is the result of an increasing money supply. An increasing money supply is caused by gov and the fed who are printing more and more dollars diluting it’s purchasing power.
2. Regarding buying vs renting…
Say a house cost 200k you’re monthly payment on a 30yr fixed at 5.5% = $1135.58. Then you have to add in taxes and maintenance. You’re monthly cost is more like $1500. (The total amount of interest payed will be 208k over 30 years.)
Even if you’re able to rent a 200k house for $1500 in San Diego. The only want to make money is long term.
If you rented for 30 years at $1500 and just invested 208k over 30 years it’s hard to say which way will make more money.
I do know when you try to sell if the 200k property hasn’t appreciated you’re in trouble. I also know that realtors charge 6% to sell your house.
Doughboy… I don’t think it works that way. At least not when the house gets older than 25 years.
I live in a 45 year old house. No way we spend 45k per year on maintenance and upkeep. Not even close to $25k. And we’ve been in it a while – so we’ve already been hit with a lot of the big bills.
UCGal I agree. I have a 70 year old house in Atlanta and I spend less than $5K a year on average. And no it’s not a dump (it is small however).
I just bought a 25 year old house in Oceanside and there is no way it needs anywhere near 25K maintenance per year. maybe 4K tops, and it has significant mature landscaping.
shadash,
You also have to consider what happens if/when the purchased home is payed off. After 30 years (less, if extra is payed regularly toward principal), there would be no mortgage payments. On the other hand, after 30 years, rent would still be due on the first of every month.
This is the only convincing argument I can find for purchasing vs. renting. At some point in the future, the home will be paid off. The key is to factor in all of the costs and purchase something that’s genuinely affordable, not just an affordable monthly payment.
I agree with osidebuyer. I don’t see how it could cost $25k/year in maintenance for a 25-year-old house. In eight years, that would be $200k. One could do a significant remodel/update with that much money, and then there wouldn’t be the need for much fixing for several years.
I disagree that these calculations apply to all markets. A $400K house in San Diego is significantly smaller and on a smaller lot than a $400K house in Phoenix. I don’t think that both would have similar maintenance costs.
I think everybody’s estimates are way high, except in lower priced areas. I personally would guess maybe a couple bucks a square foot. That is, the cost you buy the house for doesn’t matter, the square footage does. And I don’t think older properties have nearly as much extra costs as doughboy is suggesting.
Also, it depends on what we are calling maintenance. Are we including paying for a gardener, a pool guy, and a maid (instead of doing all that yourself)?
Siding and roof type can make a big difference on the exterior costs–I grew-up in a stucco/brick house with a tile roof and aluminum windows. I think my parents went 20 years without hardly touching the outside other than painting the trim and mowing the lawn.