Is it really cheaper to rent? Why you shouldn’t buy a house right now.

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I know I promised to write a how to about buying a house, especially for the newly graduated medical student but I just can’t see many positive in buying in a market like the one that we are facing right now.

The housing market in certain markets may make a little sense but here are a few rules that I think you should follow.

1. Do not buy a house if you are planning on staying in one place for only 3 years. This goes for the many internal medicine residents that I’ve met so far. I know you may be upset by my opinion here but think about it: you have to pay for closing costs which can be about 3% of the value of your home. When my mom and I refinanced her house a few months back, the cost of the refinance was almost 5 thousand dollars. In addition, there are costs associated with selling the property when you decide to leave which in today’s standard is going to cost you 6% of the sale price of your home. This means that you need to make up 9% in appreciation in the few years that you will stay to break even.

2. You don’t live rent free if you sell your house for the same price when you move out. but what does breaking even mean? You may be thinking: “if i rent, i’ll just throw my money away and if i break even on my house, I’ll actually come out ahead because I didn’t pay any rent for my place” This is wrong logic because what you are actually doing is renting money. What I mean by this is that instead of renting an apartment for say 1000 dollars a month…for simplicities sake, you are renting a mortgage or a loan. If you pay 200,000 dollars at 6% mortgage, you are paying 12,000 dollars a year in interest. That comes out to 1,000 dollars a month on interest. In both cases, you are going to be paying for rent. You only come out ahead if you see an appreciation of your home.

3. The housing market doesn’t always appreciate. Some people may argue with me about this one but for the past few years this hasn’t been the case. The tip of the “bubble” being the tail end of 2005 in some places. Of course you need to think about the local markets but the general market is on a downturn and I don’t think anyone can confidently say that their house has appreciated in the past year.

4. Please remember that there are hidden costs to your new home. Again, property taxes and home owners association fees can take a big chunk of money away from you so when calculating your final costs add that to what you are paying. I know of some places that have crazy low prices but when I visited those apartments/townhomes/condos, the homeowners fees were north of 300 a month. For residents and medical students and young professionals, this is over 20% of the total housing costs.

5. You don’t actually get much of a tax break The big selling point for real estate agents is that you can deduct your mortgage interest when you do your taxes. This is true but please remember that you only benefit from a tax deduction when you go above and beyond the standard deduction which everyone is entitled to. For singles the standard deduction is 5350 for 2007 and for couples its 10700 dollars. If you are married and bought a 150,000 dollar house paying 6% interest…your yearly interest payments will be 9000 dollars. This doesn’t even cover the standard deduction so you don’t get any benefit from owning a home. If you are single, then you will be able to deduct 3,650 dollars a year in mortgage interest above and beyond the standard deduction. At an income bracket of 25% for those making 31K to 77K will mean an absolute savings of 0.25 x 3,650 = 912.50 dollars in taxes every year. This is chump change when you think of the fact that you’ve paid 9000 dollars in interest for your mortgage.

6. Interest rates are going up. even with the housing market taking a downturn and prices slowly adjusting downward, because of rising interest rates, you are still going to be paying a lot for a new home unless you buy with cash. My money blog did an excellent article on rising interest rates.

7. Don’t buy a new home in a new town before you lived in that new town for a few months at the very least. I don’t understand why some of my former classmates decided to buy a new home in a brand new town before they even moved there. It makes sense if they know the area very well but its really hard for an out of towner to figure out what the good areas are and put so much trust in a real estate agent that is dying to get your business. If you are planning on buying a home, wait a few months, wait a year. Home buying is such a big decision that you shouldn’t rush into it.

8. currently, in many places, it is still cheaper to rent. With all things equal, many many cities across the US, renting makes a lot of sense. Some people are actually renting in hopes that the housing market will bottom at some point and then they plan on getting into the housing market at a discount. This may make sen for some of you who are betting that there will be a bottoming out at some point in the near future. A few friends of mine believe that this will take place at the end of 2008, when the first set of ARMs (Adjustable rate mortgages) are done resetting.

Ultimately, it is a decision that you have to make. There are many intangibles that go with home ownership and if you are planning on staying put for many many years, the short term fixed costs of closing on a house will be small. Some of you may think “im going to rent my place out if i don’t sell” and I will tell you that I have met a few residents and doctors that try to do this, and it is a real headache especially if you are going to be an absentee landlord.

A few websites to check out

• thehousingbubbleblog.com - get your bubble news here
• housingpanic.blogspot.com - get your bubble news here too
• I wrote a step by step guide to finding an awesome apartment where ever you may be located.

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