Rent Versus Buy ?
November 24, 2009
The large headline and the colored map of the United States filled approximately one quarter of the front page of the Wall Street Journal this morning. Perhaps the amount of space allocated to this news story was commensurate with the headline "1 in 4 Borrowers Under Water". Since the mid to late 1980s when the last major downturn in property values occurred, technology and data analysis have created computer programs that come up with this type of statistical data. I do not remember every hearing numbers of folks who were "under water" in 1989. I did personally know that folks were because my son had purchased a home with an FHA loan in 1983 and he owed more than the home was then worth. At that time I counseled him to just hang tight, make his payments and as long as he could afford the payments it would work out. Fortunately it did and even though the home is off its peak value, it is still worth double what he paid in 1983.
What does all this have to do with "rent versus buy"? Those homeowners who now owe more than their homes are worth are, in my humble opinion, "renters" - at least for the time being.
They are "renting" from their lenders and depending on the type of loan that they have, they may or may not be contributing to the reduction in the amount of the loan. Again, as long as they can afford the payments, they have a place to live that presumably was desirable when they made the purchase.
Lenders are struggling with how to make modifications and one lender is quoted in the Wall Street Journal article as saying that they will not be able to do refinances or loan modifications until the appraisals are irrelevant.
If folks can find a place to rent at a much lower monthly payment, it is difficult to convince them to not walk away from their mortgage debt. If banks find a way to lower mortgage payments, perhaps more homeowners would choose to stay in their homes and make those payments and the tidal wave of foreclosure would subside.
Here is an interesting twist. I read of lenders foreclosing on a home and then renting it back to the resident homeowner. Why? Because the bank is betting that selling the property in the future will garner a larger return than taking a loss on a sale today. Homeowners might also consider that keeping their payments current and waiting will also allow them to regain much of their lost equity - not today, probably not for several years, but if the future resembles the past, the return of value will occur.
The large headline and the colored map of the United States filled approximately one quarter of the front page of the Wall Street Journal this morning. Perhaps the amount of space allocated to this news story was commensurate with the headline "1 in 4 Borrowers Under Water". Since the mid to late 1980s when the last major downturn in property values occurred, technology and data analysis have created computer programs that come up with this type of statistical data. I do not remember every hearing numbers of folks who were "under water" in 1989. I did personally know that folks were because my son had purchased a home with an FHA loan in 1983 and he owed more than the home was then worth. At that time I counseled him to just hang tight, make his payments and as long as he could afford the payments it would work out. Fortunately it did and even though the home is off its peak value, it is still worth double what he paid in 1983.
What does all this have to do with "rent versus buy"? Those homeowners who now owe more than their homes are worth are, in my humble opinion, "renters" - at least for the time being.
They are "renting" from their lenders and depending on the type of loan that they have, they may or may not be contributing to the reduction in the amount of the loan. Again, as long as they can afford the payments, they have a place to live that presumably was desirable when they made the purchase.
Lenders are struggling with how to make modifications and one lender is quoted in the Wall Street Journal article as saying that they will not be able to do refinances or loan modifications until the appraisals are irrelevant.
If folks can find a place to rent at a much lower monthly payment, it is difficult to convince them to not walk away from their mortgage debt. If banks find a way to lower mortgage payments, perhaps more homeowners would choose to stay in their homes and make those payments and the tidal wave of foreclosure would subside.
Here is an interesting twist. I read of lenders foreclosing on a home and then renting it back to the resident homeowner. Why? Because the bank is betting that selling the property in the future will garner a larger return than taking a loss on a sale today. Homeowners might also consider that keeping their payments current and waiting will also allow them to regain much of their lost equity - not today, probably not for several years, but if the future resembles the past, the return of value will occur.
posted by shirley harry at 7:54 AM
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