Why a starter home is one of the worst mistakes a new homebuyer can make

Ben Carlson,
CFA.
Courtesy of Ben
Carlson

In February,
I bought a starter home.

So when I came across
a blog post on A Wealth of Common Sense by Ben Carlson of
Ritholtz Wealth Management calling buying a starter home one of
the worst moves you can make financially as a younger person, I
gulped.

And then I had to know more.

Carlson further explained his take on the phone. A starter home,
he says, is any home you dont plan on staying in for the long
term.

Carlson, whos a married homeowner in his mid-30s, as well as a
CFA Charterholder, watched many of his friends follow the
traditional path:
get married, buy a home for the time being,
have kids, upgrade to a bigger, more permanent home. However,
he saw that these starter homes were more expensive than the
buyers planned, from making improvements up-front to extricating
themselves from the property later.

When he ran the numbers, he realized that, generally, starter
homes just dont make sense. For one thing, the bulk of your

mortgage payments in those first years go directly to
interest payments, meaning you havent built much equity by the
time you trade up.

The median house price is roughly $200,000, he told me, and
for the sake of argument, lets say you dont put anything down.
If you stayed there for five years with a 4% interest rate on a
30-year fixed mortgage, two-thirds of your payments go to
interest costs alone. You dont build up a ton of equity.

He said that the break-even point for a home tends to be between
five and seven years, depending on where you live. If youre in
the house for less than that time, you sink money into closing
costs, property taxes, improvements, and even realtor fees when
its time to sell.

If youre going to buy a house, buy something youre going to
stay in for seven to 10 years, he said. Otherwise, those costs
are going to eat up most of your equity.

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But, I pleaded with him, I live in the New York
metro area. Arent there exceptions to this rule?

Turns out there are, and Im not the only one who was dying to
hear him say it. After that blog post went up, readers from major
cities like New York, San Francisco, and Philadelphia reached out
to say theyd done the math and, in fact, buying a starter home
made more financial sense than continuing to rent.

I think the break-even point is a little shorter, Carlson said.
I think there are always caveats, always. And I have had people
say theyre going to hold onto the starter home and rent it out
when they leave. Theres a lot of nuance to it — theres always
personal situations that intervene. Real estate is probably much
different in New York City than it is in the rural Midwest, so I
think there has to be some give and take there with the local
market.

Carlson isnt against buying a home overall. In fact, hes
strongly in favor of it — if its somewhere you intend to stay
for at least a decade. Until then, though, dont look down on
renting.

I think for young people, renting is underrated, he said. When
youre young, renting gives you more options. People say they
dont want to pay someone elses mortgage, but I think especially
when youre young and not tied down, it gives you the ability to
pick up and move to another city for a job — a little leeway. A
house is much more expensive than people think. Its more than
just a mortgage.

Buying a home is cheaper than renting — especially in Houston

Saving for homeownership is no easy feat, but the financial benefits typically outweigh the initial cutbacks. With todays high rental costs and low interest rates, prospective buyers might consider exercising their savings funds sooner rather than later. According to a new study from Trulia, buying a home is currently 37.7 percent cheaper than renting from a national perspective.

Over the past year, the national average interest rate dropped from 3.9 to 3.7 percent. And despite the fact that current low interest rates are likely to rise toward the end of the year, not every renter is rushing to gather a down payment. The chief deterrent is rising home prices, which grew 5.9 percent over the last year compared to a softer 3.5 percent jump in rent prices.

Although prices dissuade many would-be buyers, purchasing a home offers the best deal seen since 2012. In each of the top 100 metros, buying is more cost-effective than renting, ranging between a 20 and 50 percent difference in long-term costs. To ease your concerns regarding mortgage rates, the Federal Open Market Committee (FOMC), commonly known as the Fed, would have to at least double rates for the scale to tip in favor of renting. On every front, buying makes the most sense especially in the South.

Regionally, the South offers the greatest financial benefit of homeownership with eight out of the top 10 best buying metros, including Houston.

Houstons median home value this fall is $176,513, while the median rent is $1,575 per month, which means buying homes in Houston is 52.9 percent cheaper than renting them. In order for the financials to shift in favor of renting, the median home price in Houstonmust reach $405,980,while interest rates would have to rise to 14.2 percent. Although neither scenario is likely to occur soon, home prices have a much shorter distance to go compared to the massive hike interest rates must make to tip the scale.

San Antonio is just shy of the top 10 metros where buying is cheaper than renting, at a 50 percent cost difference benefiting homeownership. The median San Antonio home costs $155,273, compared to a median rent of $1,350 per month. In order for buying to become less advantageous than renting in San Antonio, home prices would have to jump to a median $336,942, while interest rates would have to rise to 13.3 percent.

Buying a home in Fort Worth costs a median $174,171, while renting costs $1,450 per month, making homeownership 46.4 percent less expensive than leasing. Buying would only become less advantageous if home prices rose to $346,600 or interest rates jumped to 12.3 percent.

Although Dallas homes share a slightly more expensive median of $215,053, buying is still 47.4 percent cheaper than the median apartment cost of $1,650 per month. Residential real estate prices in Dallas would have to jump to $434,407 in order for homeownership to be more expensive. Meanwhile, interest rates would have to increase to 11.9 percent for this move to occur.

Austin is one of Texas pricier metros, with a median home value of $258,297 and a median rent of $1,700 per month. Nonetheless, buying a home in Austin is over 40 percent cheaper than renting. In order for renting to economically outweigh buying, home prices would need to go up to a median $452,020 and interest rates would have to jump to 9.7 percent.

If homeownership is on the horizon but you havent quite amassed a 20 percent down payment and closing costs, dont fear. Interest rates have a long way to go before they tip the scales toward renting. Keep in mind, however, that shifts in home prices could have the greatest impact given the current market. Planning to delay in the hopes of a market slowdown might hurt more than help, especially with home prices climbing nationally.

Greece’s National Bank Securittises Business Loans To Raise 300mn

National Bank of Greece (NBG) said on Monday it had concluded the securitisation of business loans which would allow it to raise up to 300 million euros in medium-term funding.

The bank said it would place the senior notes with the European Investment Bank, the European Investment Fund and the European Bank for Reconstruction and Development.

It was the first securitisation transaction since 2007, National Bank said.

It said the transaction sought to enhance the access of Greek small to medium sized businesses to ‘affordable financing’.

Additionally, the bank said it would launch new lending for investment projects in Greece in November, covering a two year period in which more than 2,000 small to medium sized businesses and midcaps stood to benefit.
Source: Reuters