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Office Location 18902 89th Ave E
Puyallup, WA 98375
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Rent vs Buy?

Posted by Brett Tousley on Friday, November 19th, 2010 at 9:31pm.

Renting vs Buying? 
I've been asked several times this week by potential home buyers whether they should buy now or continue to rent and hope to time the bottom.  For those of you who think they can time the bottom of the market, I'll tell you that you are already too late if you are hoping to buy in the sub $200,000 market.  These homes are moving quite well right now and should continue to do so as long as the low financing continues. 
I’ve been a homeowner since I was 23 years old and am a Real estate broker.  Clearly, I believe very strongly in the power of leveraging money to purchase real estate.  The home I live in now, I purchased for $226,000 9 years ago.  It’s still worth $300,000 or more in this market.  My first home was financed at 9.25% on a 7 year balloon and I had to put 10% ($9,600) down on the home.  At the time, I was happy to get the financing.
In the current reality of financing, you'll have your option of VA (100% financing), USDA (non veteran 100% financing), Homepath (3% down., 97% financing), FHA (3.5% down, 96.5% financing) or conventional financing starting at 5% down and 95% financing.
Here’s my take on the market here in Washington:
Currently we have a high amount of foreclosures and short sales that have driven the housing prices down to more realistic levels.  I expect this trend to continue until mid 2011 and start clearing up towards the end of the year.  As the economy continues to recover, I expect to see the housing market return to its normal 3%-5% appreciation rate.  
Here’s the danger in renting, I fully expect mortgage interest rates to increase over the coming months.  Right now you have a once in a lifetime chance to secure a 30 year fixed rate mortgage in the 4’s.  That is an amazing opportunity! 
The best illustration of the power of cheap money is to use our mortgage calculator on the website.  Run the numbers on a $200,000 purchase at 5%, 6% and 7%.  You’ll see that your monthly payment is much more significantly impacted by interest rate than a potential drop of $10,000 in value.
$200,000 purchase with 20% down @ 4.5% =’s $1009.00
$200,000 purchase with 20% down @ 5.0%=’s  $1057.00
$200,000 purchase with 20% down @ 6.0%=’s $1157.61
$200,000 purchase with 20% down @ 7.0%=’s $1262.82
Now let’s look at a 5% drop in property values over the next year, that’s $10,000:
$190,000 Purchase with 20% down @ 4.5% =’s $958.58
$190,000 Purchase with 20% down @ 5.0% =’s $1004.39
$190,000 Purchase with 20% down @ 6.0% =’s $1099.73
$190,000 Purchase with 20% down @ 7.0% =’s $1199.68
You’ll save approximately $50.00 a month if you wait and prices fall another 5%, BUT  you will have thrown away a full year on rent.  At $1500 a month, that’s $18,000 or $5892 more than if you were to purchase a home now. If prices don’t fall another 5%?  You’ll be losing $50.00 a month AND paying $18,000 in rent or $6492.00 more than if you would have purchased a home.
Of course due to the variables in tax rates, these figures do not include your mortgage interest tax deductions. I’m also not taking in to account the pending inflation and increased rental demand that will most likely increase your rental payments over the upcoming years. To sum my thoughts up, If you plan on owning the home for 3 or more years, you most likely will benefit from buying now. 
If you plan on owning the home less than 3 years, you are most likely a renter and will pay more per month on your next home than you could purchase for right now. 

Brett Tousley is the designated broker and owner of NW Home Brokers.  He can be reached at 253-820-2745 or broker@nwhomebrokers.com

2 Responses to "Rent vs Buy?"

Ron Brown wrote:
All of your numbers are correct, and you have done a good job in explaining why a low interest rate trumps a potential drop in value. However, you left out another component that supports your position. If you buy today, you will have a years worth of principal reduction on the new home, which is $3,200 in the first year for a $200,000 loan at 4.5%. Add that to your $5892 from the article, and the cost of waiting is over $9,000!
Amortization is a fairly complex calculation, but it comes down to the fact that a 30 year fixed mortgage must always have 360 equal payments so when you get locked in at a really low rate you also benefit by paying more towards principal in the beginning than those with higher rates. This is important for a buyer who does not plan on owning the home more than 5 to 7 years because they might owe less when it comes time to sell versus someone who started at a lower amount, but a higher interest rate one year later.
The bottom line is that if you consider even the lowest amount possible for tax benefits of owning, buying today under your scenario will leave the buyer better off than waiting, and hoping for a price drop.

Posted on Saturday, November 20th, 2010 at 8:37am.

Brett Tousley wrote:
Good point Ron, thanks for running the numbers!

Posted on Saturday, November 20th, 2010 at 12:50pm.

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