Wednesday, June 21, 2006

Real estate: Buying doesn't always make sense

Greetings from Seattle. Another city, another free rental car upgrade -- National had no compacts in stock, so I ended up driving off with the same mid-size I had just declined to pay an upgrade charge for.

Someday I hope to acquire the skill of regular blogging. For now, I'll have to be sporadic -- sorry! But be assured that even if I go silent for a stretch, I'm not abandoning the ship.

I finished one of the house-buying books I mentioned earlier, June Fletcher's House Poor: Pumped-Up Prices, Rising Rates, and Mortgages on Steroids. My verdict: It's a clip job, but a pretty decent one. In the acknowledgments, Fletcher makes a comment about the project coming together very quickly. She's been covering real estate for two decades, lately for the Wall Street Journal, and my guess would be that a publisher approached her about striking while the market is hot and scraping together information from her articles for a quickie book.

Which means there's some definite filler in the already-fairly-slender (224 pages) book, like the "Going Global" section with snapshots of, say, buying conditions in Panama. I would guess that almost no one picking up this book is actually looking to buy in Panama, and people who are will need a lot more data (and more current data) than this offers.

For those at the earlier stages of considering real-estate purchases, though (like me!), House Poor has value. The main point I took away from the book -- and I think it's a pretty useful one -- is "don't fall for the line that everyone needs to buy, quick quick quick!" Fletcher has covered several complete real-estate boom-and-buy cycles, and she doesn't endorse the notion that buying an apartment/house is always a smart investment -- even for your primary residence. On a purely financial level, renting can be smarter in a number of circumstances.

For instance, one of her anecdotes concerns a couple that bought at the height of the last boom in D.C. -- and found, three years or so later, that they couldn't resell the house for enough to cover its mortgage. Over the last few years, with prices skyrocketing double-digit percentages each year, it's tempting to see real estate as the investment that just keeps giving. But booms always inspire that sense of frenzy -- and booms don't last indefinitely, no matter how much industry observers cry "but *this* time the fundamentals are different!"

Friends of mine in the D.C. area just had to sink five figures into a complete overhaul of the piping in a house they bought only a year or two ago. If your house is intended as your long-term primary residence, you sigh and grumble about those sorts of unexpected costs, but can take some comfort in recognizing that they'll be amortized over the lengthy time you spend in the dwelling. If this is a house you intend to unload in five years? If prices don't jump a *lot*, you may not recoup what you've paid for those unexpected fixes.

There are, of course, non-financial advantages to owning. I want to decorate and have the freedom to treat the place I live as *mine.* I'm willing to spend extra money for that psychological comfort. In NYC now and for the foreseeable future, buying costs a fair bit more than renting a comparable apartment. Even if I crunched numbers and discovered that the equity of owning a place didn't offset the costs -- that renting and investing would be a more financially advantageous option -- I would still buy, for the psychological reasons.

However, I likely wouldn't if I knew I'd be reselling in less than, say, a decade. Imagine a couple with part-time kid custody. They know that when the kids leave for college, they'll move to a smaller place in a better location. They're deciding whether to rent in the interim or buy a larger place that they will eventually sell and "trade in" for the smaller one. It isn't a given that this couple should buy. Depending on the relative costs of each option, and the likely appreciation in housing prices in their market, it may be wiser to rent, sock away difference each month between what they pay for rent and what they would have spent to buy, and use that cash pile -- rather than equity/appreciation from the house they would have bought -- to fund their eventual trade-up.

Fletcher kicks around such scenarios to make the point that buying real estate is a complicated calculation. That alone makes House Poor helpful and interesting. It's also a good basic reference for information on how things like interest-only loans, reverse amortization, PMI, and other logistical considerations work.