Monday, October 29, 2007

Renting is Even Cheaper than You Think

Home prices are dropping, and if you are anxious like me, you might be starting to compare your monthly payment (adjusted for taxes) to your rent. But there is a little twist that many don't consider.

If you buy a house, you will no longer be making interest on your down payment. (I'm making a rather brazen assumption that have to have a sizable down payment to qualify for a loan.) So when I compare my potential adjusted monthly payment (including any HOA and Mello-Roos etc) to my rent, I use an interest adjusted rent (Rent minus the $250 or so in interest that I make off our down payment each month). To some degree, you could say I am factoring in the opportunity cost of buying a house.

When you make this downward adjustment in your rent (13% reduction in my case) will realize that we are nowhere near where we need to be for this market to recover. Compared to purchasing, renting is a bargain. When you adjust your rent for interest, its even more of a bargain than you realized!

Speaking of downpayments earning interest. We are looking into a higher yielding investment to stash our $$ while we wait this out. Being optimistic, we originally put it into a high yield savings hoping to purchase sometime this year. Seeing as how we are still a ways off, we figured we should do more with our down payment.

Anyone have suggestions? I don't know much about the dizzying array of financial products beyond the general stuff.


Jacob said...

Yea definitely something to consider. I had thought about this and track my income each month and count interest separately since that would drop off when I buy.

Of course if your home is appreciating 4% or so per year then you break even on the interest anyway, but in a down market it is better to save.

I mainly do CDs and Savings. Etrade Bank was at 5.05% but just dropped to 4.70%, this is on a normal Savings account, so I can move the money anytime I want.

Anonymous said...

Buy Gold via GLD. It has much higher to go!

Paul said...

And tomorrow at Bay Meadows, bet everything on Lucky Strike to place in the 5th! LOL!

Money market mutual funds (the better ones) are currently paying about 5%, but expect that to drop if the Fed keeps cutting interest rates. (Wednesday is the day!) CD's are about 5% (check them out at B of A stock is paying a quarterly dividend of about 5.4% (annual rate). Wachovia is almost 8% dividend. But of course, the stock could decline further in value. Probably the "safest" that I know of in the market is currently the CD's. Maybe at first, split your money between 3 month and 6 month, that way 1/2 comes in every 3 months and you can decide if you are close to buying yet, then keep it in a more liquid account.

I currently favor AAA rated preferred stocks with nearby call dates. They are paying about 7% if you buy right (B of A, Royal Bank of Scotland, etc.), with potential capital gains of several percent more if you hold to the call date. Because the bank stocks have been hammered so much lately, these prices have been driven down as well, yet the preferred stocks must be paid their dividend before the bank can pay a regular dividend, so a higher level of security for the buyer.

When I calculate housing cost (vs. renting), I take the total purchase price at 6% (cost of money, whether downpayment of financed), reduced by tax savings on the portion financed (depending on your bracket), plus property taxes, plus sewer/water/garbage (which my landlord pays), plus maintenance and depreciation, then add in the appreciation (if any). And you are right. We have quite a ways to go!

Mike said...

Somethings I did/doing with my money from cashing out of my house in Late 2004.

Majority of the profit I made from selling my house is earning interest in short term US Treasuries. It used to be in bank CDs but US treasury bills are more convenient and close to CD rates.

I also have about 30% of the profit money in foreign currencies and Gold/Silver stocks. I bought those about two years back, it might be too expensive now.

I took 10% of the profit and shorted homebuilder stocks. Doubled my money on those and I am now out.

Now since my time to be a homeowner again is nearing (6 months or less?) I am holding steady with my money without trying to do high risk investments. (Although, I would love to put a good chunk to short or buy put options on the Dow or S&P)

Sippn said...

AB - if you don't know, don't do it. Savings account is the only guaranteed safe investment. Risk = more return. Money market has more risk and no guarantee.

Is investing in the stock market while it is at this peak similar to investing in RE in 2005? could be.

What do most people know about gold, shorting stocks, etc?

Buying Time said...

Brilliant strategy Mike. Love the part about shorting the Homebuilders. Nicely diversified, too.

Wish I wasn't so risk adverse....I would also love to "to put a good chunk to short or buy put options on the Dow or S&P". Unfortunately I have never bought a stock or bond outside my 401k. So I would need to book up a bit on that before making any moves.

In the mean time, 5% sounds like a respectable rate from everyone's feedback.

Gwynster said...

401K (on top of the normal UCRP account) is now all in Treasuries. I made my money on Etrade earlier in the year and now monies are in staggered CDs which are easy and fairly safe. I buy these every 2 to 3 months.

The only thing I don't have is an interesting earning checking. I'm avoiding MM like the plague. I am probably the most risk adverse person you will ever meet.

Gwynster said...

Mike, I did the HB short and bit my figernails the entire way. But when things became crazy in late spring, I cashed the trading account out and moved to CDs.

Earning 5% on failry liquid cash while homes are falling in value just seemed like a no-brainer. I haven't broken the 100k FDIC limit yet but once I so, I start spliting up the CDs between carriers even more. I'm starting to get really nervous about the banks.

Mike said...

" I haven't broken the 100k FDIC limit yet but once I so, I start spliting up the CDs between carriers even more. I'm starting to get really nervous about the banks."

Gwyn, this is the reason I moved from CDs to Treasury bills. I was over the FDIC limit and I was tired of trying to split the money into different bank accounts. Additionally, even when I was below the FDIC limit, I still was concerned about the banks going under and FDIC's capability to get my money back in a timely manner.

G Spot1 said...

What % are you guys earning on the Treasury bills?

I'm mostly in a Vanguard MM, earning about 5% but the yield has been slowly going down recently. My savings account yield is also going down and expect it to drop further if (when) the Fed cuts rates.

Mike, you sound like a guy who has no problem walking away with a big stack at the blackjack table. I'm impressed.

Gwynster said...

My Ts are the shortterm straight up treasuries (no other bond crap) through Fidelety. I'd have gone with Vanguard but I'm stuck with Fid through work.

My short terms aren't doing as well as they used to either but considering the risk, I'll crap earnings over none or loosing.

Mike said...

"Mike, you sound like a guy who has no problem walking away with a big stack at the blackjack table. I'm impressed."

Ha ! Gspot, that is so unlike me. I am very conservative with my money. I rarely gamble, and if I do go to Reno/Tahoe on rare occasions. I stick to quarter machines at most.

The homebuilders stocks were so overpriced (like the homes were overpriced), it was a very low risk investment to short them.

Same thing with my investments in foreign currencies and Gold/Silver. It has been known for long time US dollar has been going down the toilet and will continue to do so. So, in my mind, this was a very low risk investment as well.

But even with relative low risk investment, I still worry with those investments as well. I am definitely not a big gambling type.