Homeowners of Texas - 05/02/10: MARKET: Should You Buy or Rent? Consider the Hidden costs.

Should You Buy a Home or Rent?
Renting may be smarter if home prices in your area will fall further.

HOT SUMMARY: The article uses a price:rent ratio to advise consumers on this important decision, but its simplistic approach arguably contributes to the problem of overspending. Here's the comment we added:

Mortgage Interest Tax Deductions.
Artificially Low Interest Rates and Adjustable Rate Mortgages.
Tax Credits for first time home buyers was promoted as free money, and Congress extended the program to repeat buyers. This tax credit was like a drug, and the housing industry became addicted. Extending the credit just worsened the problem.
Down Payment Assistance. FHA rules made the down payment issue worse by allowing volume builders to give buyers the required 3% down payment through third-party non-profit corporations such as Nehemiah Corporation in California. Builders gave money to Nehemiah, who then gifted the funds to the buyer for a small fee paid by the builder. It was a way to put more renters into homes and line the pockets of homebuilders.
Federal Mortgage Insurance. Banks normally want 20% down but will gladly lend when the government insures loans with just 3% down or less. FHA, VA, Freddie Mac and Fannie Mae now guarantee some 80% of all new mortgages and have insured 96.5% of new mortgages so far this year, putting even more of the burden of risky loans onto taxpayers.
Low Down Payments. The USDA now even has a zero-down home loan program, and Texas has begun a down payment assistance program. These were homebuilder initiated proposals that are primarily aimed at generating wealth for builders, realtors, mortgage lenders, and Wall Street. Government officials knew, or should have known, that zero-down loans would put borrowers at risk and taxpayers on the hook. That's because buyers with little or no skin in the game would be more likely to default on loans and go into foreclosure when inflated home values fall below what is owed, or when property taxes or adjustable interest rates rise, or when employment or medical problems arise.
Net Operating Loss Carryback. The extension of this tax provision allowed big builders to refile their tax forms and get over $2.6 billion in rebates from taxpayers, a windfall they've been using to buy up land at discounted prices and to disadvantage smaller builders.

The hidden costs of homeownership

Many first-time buyers are unprepared for the financial burdens of homeownership.

Lenders tell them the maximum they can afford based on their incomes with little regard for the "extras" such as utilities, upkeep and improvements.

You're told what your monthly nut for principal, interest, taxes and insurance — the all-important PITI — will be. But likely because you won't know exactly what the other costs will be until you actually move into your new place, they are rarely mentioned. And as a result, borrowers who mortgage themselves to the hilt often find themselves "house poor."

They own a home, all right, but they can't afford anything else. Sometimes not even the heat or hot water.

Rookies who are transitioning from an apartment are usually better prepared than those who are making the move from the family nest. Renters probably paid at least something for their utilities, whereas those leaving the friendly confines of Mom and Dad's house for the first time probably have never ever had to dig into their pockets for food, let alone electricity.

As owners, though, they will be responsible for electricity and/or gas, water and sewer and trash removal. Then there's the phone bill if you want a landline, and cable if you expect to watch television.

Utilities are a big add-on. According to the U.S. Department of Energy, the typical family spends $1,900 a year — $158 a month — on home utilities.

Another frequently overlooked expense is association dues. There isn't any hard data, but estimates are that four of five housing starts in metropolitan areas are part of "common interest" subdivisions or condominiums. That means residents not only own their homes or apartments but also a share of the community's public areas — the streets, parking lots and walkways — with all the other owners.

Some 60 million people nationwide live in 305,000 homeowner and condo association-governed communities, all of which collect fees usually monthly or quarterly, according to the Community Associations Institute (CAI). Even if you don't use the pool or golf course, you have to pay your share.

Whatever the amount — less than $25 monthly or more than $500 — it shouldn't be overlooked. "I don't think we've properly addressed it in terms of the real cost of housing," said Steve Melman, director of economic services at the National Assn. of Home Builders (NAHB).

Indeed, as Melman rightly points out, the tax benefits of ownership — annual mortgage interest and property tax write-offs — are often offset, at least partially, by the cost of association dues. Not only are dues not deductible, he notes, they "add a significant amount" to the monthly outlay.

Another significant expense all buyers, not just first-timers, tend to forget is what they'll spend for furnishings, appliances, and property alterations.

A 2007 study by the Harvard's Joint Center for Housing Studies shows that consumers spent an average of $14,206 on home improvements during their first two years of ownership. But according to NAHB's research, most of the extra spending — 60% — occurs within the first three months after taking occupancy.

The spending doesn't stop there, though, especially if you're buying a previously occupied house. There's also the cost of upkeep.

"Whether you are moving into a new or old home," says Dan Steward, president of Pillar to Post, a home-inspection company, you "need to be aware of the ongoing maintenance any home requires."

Buyers should figure on spending 1% of the home's value per year for maintenance, Steward said.