Debunking The Wall Street Journal: Key Misses in Home Buying Analysis



Let’s get into the housing market insights from The Wall Street Journal's analysis. They've compared monthly mortgage payments to average rent costs, indicating a potential decline in home buying viability against renting. However, the analysis misses key elements like tax deductions, home equity growth, and societal impacts of the growing preference for renting. This report explores the complex factors influencing housing decisions and emphasizes the importance of promptly securing a home amidst changing interest rates and evolving market trends. It's a crucial moment to secure a home amid these shifts.

Wall Street Journal's Take on Buying vs. Renting

The Wall Street Journal recently featured an article discussing the math behind home buying, suggesting it might not add up anymore. Their analysis compared the typical monthly mortgage payment, around $3,300, with the average rent, approximately $2,200.

With a $1,100 difference, they argue that buying a home is becoming less feasible compared to renting. However, I believe their evaluation overlooks crucial factors. They mention that between 2010 and 2018, buying was actually more affordable monthly compared to renting. From 2018 to 2021, the scales tipped towards neutrality, and from 2021 onwards, it became less affordable when factoring in various considerations we've discussed. This shift is attributed to increased prices, driven by inflation, nearly doubling within this timeframe. Yet, this seems like a short-sighted view to me.

Overlooked Aspects: What WSJ Missed in Home Buying vs. Renting

The Wall Street Journal didn’t factor into account several aspects in their analysis. One of these is tax deductions. When you buy a home, typically there are two tax events. First, your closing costs are usually tax deductible in the year of purchase, along with the interest on your mortgage. Despite a $3,300 payment, after deductions for interest and property taxes, your actual payment might be around $2,800, depending on your specific tax situation.

The second point is that a part of that $3,300 payment goes towards your own savings account. This comes from the principal payment you make on your mortgage. You keep the principal and can usually deduct the interest on your taxes. This strategy is influenced by inflation. The government manages inflation by printing money and often uses mortgages for borrowing, hence encouraging mortgage uptake and tax deductions.

Thirdly, there's the aspect of appreciation. This is a significant gain for homeowners and plays a big role despite the $3,300 versus $2,200 comparison. When you make a down payment on a home, let's say 5%, you get appreciation on the entire value of the home, not just your down payment. Typical appreciation ranges might be 3% to 5%, sometimes even more in recent years. So, with a 5% appreciation and a 5% down payment on a $300,000 home, you potentially double your money in that time frame. A 5% appreciation could mean a $15,000 gain, which is over $1,200 per month, more than the difference between $3,300 and $2,200. 

(For example: If you invest $15,000 (5%) as a down payment on a $300,000 home. Within a year, the home’s value rose to $315,000, an appreciation of 5%. Yet, your mortgage owed after one year was $285,000. Despite the initial investment being $15,000, the home’s increased value exceeded your remaining mortgage, effectively doubling your initial investment in the property within that time frame.)

This appreciation adds to the savings from paying off your principal and interest. Also, with higher interest rates currently, your price is locked in, but refinancing might enable you to lower your payment in the long term as rates come down – the Fed is projecting three rate cuts next year. Refinancing to a lower payment would help you save money in this way.

Additionally, as inflation continues, consider what happens to your rent. That $2,200 is probably a floor and won't likely be the ceiling; it's expected to increase year after year as the government keeps printing money and causing inflation in our country. Ever wondered why 30% of our homes are now being bought by investors? It's because they grasp this economic concept—that inflation is likely to persist, leading to increasing risks year after year.

WSJ's Oversight: Ignoring Societal Impact of Renter Nation

The Wall Street Journal overlooks another factor: not just the mathematical equation behind this, but also the societal challenges. Generally, homeowners are more engaged and exhibit greater concern for their local community compared to renters, on average. This poses a significant challenge for our society as we move towards this #RenterNation trend.

The proportion of first-time homebuyers continues to decline. It was at 38%, but now it averages around 33%. A 5% difference might not sound substantial or impactful. However, percentages can be deceptive. If you consider 38% of a larger number—let's say, in a regular year, around 5.5 million homes being sold—and compare it to the reduced number we're experiencing now, closer to 4 million homes, there's a gap of approximately 750,000 first-time homebuyers who didn't make a purchase in 2023. This will likely have lasting effects on society.

Additionally, the average median age is evidently increasing for both first-time homebuyers and buyers in general. First-time homebuyers are delaying their initial home purchase by an additional four years. For repeat buyers, the delay has extended to 15 years.

Securing Your Home: Matt’s Advice for a Changing Market Landscape

Once again, the real issue here is the gradual shift toward a society that leans heavily on renting—a sort of #RenterNation. This isn't good for our society or for wealth building in our country. As we've talked about before, homeowners typically have around 50 times the net worth compared to renters.

Another point is that when our country was founded over 200 years ago, it was based on the idea of owning land through homestead laws. We wanted to avoid replicating the kind of system seen in other countries, where few people owned all the land and the rest were essentially sharecroppers, just working the land. Some people draw parallels between the increasing number of renters and this sharecropping situation. If big institutions like Wall Street end up owning most homes, it's like sharecropping our own homes, and that's not good for society if this trend continues.

If you're undecided and thinking about buying your first home while currently renting, my best advice is to act now. Find a way to buy a home as soon as possible. If you're eligible for a home loan, negotiate with the seller to lower your interest rate. Consider looking at new constructions where rates are being brought down. Secure a home now because as interest rates decrease, it will become more affordable. This will draw more buyers into the market. Even with fewer home sales and higher interest rates, there's not enough supply to meet the growing demand, which could push prices even higher.

The smartest move at this moment is to fix your purchase price and then explore refinancing options or rate reductions. If you can manage the mortgage rate, aim to secure the price without opting for a rate buy-down. Take advantage of the expected decline in rates over the next 1 to 2 years and then consider refinancing. It might mean enduring slightly higher mortgage payments initially, but it's worth it to secure the best price reduction and the lowest long-term payment for yourself.

 

Posted by Matt Curtis on
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