Fiscal Responsibility on First Hill

Everyone pretty much knows that renting is a losing investment compared to buying a home. But did you know that if you are currently renting on First Hill, then buying at the Decatur could actually save you thousands of dollars over five years purely on a net cash flow basis?

building03 Fiscal Responsibility on First Hill

Realogics and Cobalt Mortgage have provided analysis (and an aggressive purchase package) to prove that buying a one or two bedroom at the Decatur will save you $14K and $20K respectively over 5 years. They examined the rent, expenses, and parking fees associated with comparable units in nearby apartment buildings that lease for $1241/mo (1 bd) and $1716/mo (2 bd). They factored in a 3% year-over-year rent increase, tallied the total cost over 5 years, and then pitted the numbers against their current purchase offer. A full breakdown of numbers and variables considered is included in the media release.

The Decatur is a steel and concrete high-rise building located on Spring and Boren that was converted from apartment buildings in 2006/2007. Now 80% sold, the current purchase package offers closing cost credits and a special 3.375% (4% APR) interest rate for the entire term of a 5 year ARM. It seems almost fiscally irresponsible for you not to consider taking advantage of current market conditions, especially if you are renting on First Hill.

Disclaimer: Realogics is an Urbnlivn advertiser.

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Update (3/13):

I learned a lot in this blog post. As a writer, I learned a nearly foolproof formula for generating boo’s and hisses. It goes something like this: take a much discussed topic like “rent vs. buy”, sandwich it in-between a generalization and some marketing speak, and then watch the comments roll. For those commenters who were kind enough to leave constructive comments, thank you for the kick in the writing pants. This is not a lesson I aim to learn more than once :).

More interesting to readers, is the discussion which shows that “rent vs. buy” is a complex issue, and there’s no one answer that can be broadly applied to everyone in all market conditions. If you are reading this post and struggling to decide between renting on First Hill or buying at the Decatur, I’ve summarized some of the discussion, but you are encouraged to dig into the comments for further details, or join in with your own thoughts.

There were two main issues touched on in the comments:

Is the Decatur analysis complete?

In short, the general consensus is that the analysis does not present a complete enough picture.

Patrick is quick to point out that:

It’s very hard to do this kind of analysis correctly. Most people miss at least one or two important factors when they try to do a rent vs own calculation.

(and later) My point was that all of these assumptions can affect the analysis, and taking liberty with a couple parameters can easily skew it such that renting looks better than buying, or vice versa.

Mojo provides a good overview of what’s missing:

Sorry, but this analysis is flawed because it only captures a selective portion of the ownership costs. Most notably, no transaction costs associated with buying and selling appear to be included.

What is not included that should be?
-maintenance costs for the condo that would be the owner’s burden,
-transaction costs for buying
-transaction costs for selling
-and the opportunity cost on your down payment/transaction costs/maintenance costs (as you would not be paying these if you had rented)

Are the assumptions made in the analysis accurate?

Commenters disagreed on how accurate the assumptions made in the analysis really were – whether rent would increase and at what rate, whether interest rates would rise or decline, and even if housing prices would go up or down in 5 years time.

Patrick on rental rates:

They make the assumption that rental rates will increase 3% per year for the next 5 years. That’s not a safe assumption to make. They even claim that lease rates are expected to “skyrocket 30% over the next 5 years”.

A rebuttal from Guest:

You say “that’s not a safe assumption” when referencing a 3% annual bump in rent. To me 3% is actually conservative…turn to page 4 of Dupre + Scott Apartment Advisors’ new report. The Seattle Company says Puget Sound-area rents could climb almost 25% in the next five years and 50% between now and 2020.

EconE contributed his thoughts:

Rent won’t necessarily go up. If you’re a good tenant, a landlord will most often want to keep you rather than have an empty unit. All the more reason to rent from a private owner rather than a corporate complex.

But Phil thinks demand will push rental rates up:

Amazon is planning on hiring 1,900 more employees in Seattle, the jobs are already on their site. Russel is moving here, Nordstrom just leased more space from SAM. I like my low rent with no increases for a few years too, but reality is rearing it’s ugly head.

For the rest, I’ll refer you to the comments themselves. If you are a first time home buyer that is considering making a purchase with a 3.5% down payment and 5/1 ARM, you will find valuable discussion in there.

About katrina
  • Patrick

    It’s very hard to do this kind of analysis correctly. Most people miss at least one or two important factors when they try to do a rent vs own calculation.

    – they neglect to count the opportunity cost of your down payment. They should be counting about 2.1% interest (current 5 year treasuries rate), or slightly higher – depends on one’s personal situation and investment risk tolerance. This has a relatively small effect, but it’s larger when you consider a 10% or 20% down payment… which leads to my next point:
    – a tiny FHA 3.5% down payment isn’t exactly prudent financial practice. Nor is a 5/1 ARM. It’s not fair for them to use their special 3.375% ARM rate in the analysis, and then cut the analysis off at 5 years. Interest rates will likely be higher 5 years from now, and you can’t currently get a fixed rate mortgage anywhere near 3.375% (even on a 15-year). So by using an ARM in their analysis they’re skewing the results to improve the short-term cost at the expense of the long-term.
    – they make the assumption that rental rates will increase 3% per year for the next 5 years. That’s not a safe assumption to make. They even claim that lease rates are expected to “skyrocket 30% over the next 5 years”. Where is the data? That’s just wild speculation.

    I do think Decator prices are probably approaching a pretty good deal, but I expect more from UrbnLivn than to post a real-estate press release with exuberant agreement and no analysis of the other side of the coin.

  • A couple thoughts

    Good point on missing the opportunity cost of the down payment. With a purchase price of $187,500, the down payment amount of 3.5% would be $6562. That amount would earn interest of $137/yr (or $11/mo) @ 2.1%. Probably not going to be a huge factor when someone is deciding whether or not they should buy a $187K condo.

    As far as the 5/1 ARM is concerned, the average timeframe a first-time buyer keeps a mortgage is less than five years, so this doesn’t seem too far off base. If the buyer chose to keep the mortgage (and rates did go up), one could argue that the value of the condo would go up as well. Many economists point out that inflation will not occur until the housing market stabilizes and values start to go up (this would be good for the person that bought rather than rented). The FHA ARM has a CAP of 1% increase per year after the 5 year fixed period, which would put the 3.375% rate at 4.375% for year six (not a big jump).

    In addition, when using your theory of higher interest rates in five years, inflation usually means higher wages too (to cover the cost-of-goods increases). This means there’s a good chance the person buying the condo for $187,500 with a 3.5% down payment shouldn’t have too much trouble in five years paying a payment that has increased by ~$100/mo (worst case).

    The decision of a 5/1 ARM not being prudent is subjective as it would be difficult for you to provide any substaniated data showing that first-time buyers who chose a 5/1 ARM for their financing are any worse off than those who chose a 30F. It looks like UrbnLivn has actually done their research.

  • A couple thoughts

    Good point on missing the opportunity cost of the down payment. With a purchase price of $187,500, the down payment amount of 3.5% would be $6562. That amount would earn interest of $137/yr (or $11/mo) @ 2.1%. Probably not going to be a huge factor when someone is deciding whether or not they should buy a $187K condo.

    As far as the 5/1 ARM is concerned, the average timeframe a first-time buyer keeps a mortgage is less than five years, so this doesn’t seem too far off base. If the buyer chose to keep the mortgage (and rates did go up), one could argue that the value of the condo would go up as well. Many economists point out that inflation will not occur until the housing market stabilizes and values start to go up (this would be good for the person that bought rather than rented). The FHA ARM has a CAP of 1% increase per year after the 5 year fixed period, which would put the 3.375% rate at 4.375% for year six (not a big jump).

    In addition, when using your theory of higher interest rates in five years, inflation usually means higher wages too (to cover the cost-of-goods increases). This means there’s a good chance the person buying the condo for $187,500 with a 3.5% down payment shouldn’t have too much trouble in five years paying a payment that has increased by ~$100/mo (worst case).

    The decision of a 5/1 ARM not being prudent is subjective as it would be difficult for you to provide any substaniated data showing that first-time buyers who chose a 5/1 ARM for their financing are any worse off than those who chose a 30F. It looks like UrbnLivn has actually done their research.

  • katrina

    Patrick – Thanks for your comments about what you expect from urbnlivn. I’m new and still figuring out what to do with the media releases, as well as what readers expect. And, in fact I did feel nervous about this post coming off overly positive. Rest assured, I’m paying attention to your feedback and learning from it. You’ll see me do better in the future because of it, in fact.

    Thankfully there are readers like you and “a couple thoughts” that can and will offer insight when it is lacking in my post. That’s what is so great about the community that Matt has built on here. Thank you.

  • Patrick

    Well, yes $137/year is not much, but as I pointed out many people might want to put down a larger down payment than 3.5% – and then it can start to affect the rent vs buy analysis. If you only put 3.5% down, you’re basically starting out underwater (due to seller’s closing costs) and could be underwater for the next several years, unable to sell without it becoming a short sale. That’s a risk if someone loses their job and needs to sell.

    You’re including a lot of assumptions in your response (that inflation will correspond with increasing property prices and that inflation will lead to higher wages – in stagflation, it does not). My point was that all of these assumptions can affect the analysis, and taking liberty with a couple parameters can easily skew it such that renting looks better than buying, or vice versa.

    I still appreciate the numbers they ran, but we shouldn’t so easily accept it at face value. People who bought in 2007 made a lot of assumptions too, and that didn’t turn out so well did it?

  • Jonathan

    Oh, and, are homeowner’s dues incorporated in the analysis at all?

  • Jonathan

    Oh, I missed page two in the release. More to read…

  • Jonathan

    hmmm…the first post I made disappeared, and when I replied to my post it’s now attached to a different post than mine. Am I going nuts? Was my post deleted? I don’t think it was over the top.

  • Patrick

    Thanks Katrina, we appreciate it!
    I think it was the “It seems almost fiscally irresponsible for you not to consider taking advantage of current market conditions” that surprised me. It sounds like something a real estate agent would say. :)

  • Rents

    @Patrick, it pays to do your research before making her feel that her post was invalid or ill-served. You say “that’s not a safe assumpion” when referencing a 3% annual bump in rent. To me 3% is actually conservative. You would have had to read the report by Durpe + Scott though. I would suggest they are the “safest” firm when considering changes in apartment vacancy. I would go ahead and re-tract your “opinion” at this point.

    “turn to page 4 of Dupre + Scott Apartment Advisors’ new report. The Seattle Company says Puget Sound-area rents could climb almost 25% in the next five years and 50% between now and 2020″

    Dupre + Scott says the region will see only 2,000 units open next year, the lowest production level in 40 years

    http://www.urbancondospaces.com/seattle-rents-to-rise-25

  • Rents

    @Patrick, Not trying to be rude either. Just some healthy debate.

  • Avalidemailtocomment

    Yeah, included, but they don’t go up at all. Magic!

    Also, no insurance or maitenance.

  • Terence

    katrina,
    I think you definitely should post a disclaimer that Realogics is an advertiser on this website.

    You last statement sounds like a marketing/sales campaign statement.

  • Guest

    …and urbnlivn has officially jumped the shark

  • Guest

    …and urbnlivn has officially jumped the shark

  • Anon

    “Everyone pretty much knows that renting is a losing investment compared to buying a home.”

    Good grief.

  • Guest

    Amazing that those homeowners’ dues never rise even though this is a 1960s-era building that has been at least 20% vacant since it was converted from apartments five years ago. Apparently it was built from indestructible materials, too, since there are no costs for maintenance or replacements of in-unit or common items.

    Amazing that those tax deduction calculations assume that interest and taxes are deductible on top of the standard deduction renters already enjoy. In reality, those costs are deductible _instead_ of the standard deduction, so unless you contribute that much or more to charity your homeowner tax deduction advantage is significantly reduced.

    Amazing that although only 3.5% is provided as a down payment, no private mortgage insurance (PMI) is assumed in the calculations. Pretty sure your mortgage broker expects you to insure such a risky loan.

    But what’s most amazing is that Urbnlivn, normally more honest in its reporting, printed this press release (with a headline containing “Responsibility”) without questioning any of the ridiculous assumptions and statements made in it.

  • Guest

    Oh, and not to mention the costs of buying and selling the condo itself. This isn’t like trading stocks; it costs thousands of dollars to buy a unit, and then to sell it you need to pay an agent as much as 6% of the asking price. Even if it’s risen an optimistic 10% in 5 years, a 6% sellers’ commission will wipe out more than half of your gains.

  • EconE

    1. Rent won’t necessarily go up. If you’re a good tenant, a landlord will most often want to keep you rather than have an empty unit. All the more reason to rent from a private owner rather than a corporate complex.

    2. Cost to buy and sell

    3. Global wage arbitrage trumps inflation

    4. Deferred maintenance can be very very VERY costly.

    5. There are a gazillion optionARMs out there that will be reCASTing over the next couple years. There will be no shortage of bank owned properties to buy at much better deals down the road.

    Most laughable post ever.

  • phil

    Amazon is planning on hiring 1,900 more employees in Seattle, the jobs are already on their site. Russel is moving here, Nordstrom just leased more space from SAM. I like my low rent with no increases for a few years too, but reality is rearing it’s ugly head.

  • http://www.facebook.com/profile.php?id=790544854 Richard Letts

    I sold my house (in Austin, TX) last April. I put the cash from that sale into the stock market. Buying and holding an index fund should yield you at least 6% over the long term (which I would consider 5 years as), so the opportunity costs are quite a bit higher than the 2.1%. A 5/1 ARM isn’t a bad option for most young single people, as long as you recognize that getting out of it in 5 years is part of your plan (say, for example, buying a larger family home), or paying off more than the minimum each month, and then refinancing, or something else…

  • Mojo

    Sorry, but this analysis is flawed because it only captures a selective portion of the ownership costs. Most notably, no transaction costs associated with buying and selling appear to be included.

    What’s is not included that should be?
    -maintenance costs for the condo that would be the owner’s burden,
    -transaction costs for buying
    -transaction costs for selling
    -and the opportunity cost on your downpayment/transaction costs/maintenance costs (as you would not be paying these if you had rented)

    If you incorporated these cost factors, I believe you would find that renting is a better option over a 5-year period because the transaction costs involved with buying and selling are high.

  • Mojo

    Would you suggest consideration of rent increases greater than a historical average based on a “report” of questionable basis? The reality is that the PR machine has been churning out this material for years, both promoting AND bashing the real estate market, depending on the publisher’s interest. Don’t be fooled and stick with reasonable assumptions.

  • Mojo

    Would you suggest consideration of rent increases greater than a historical average based on a “report” of questionable basis? The reality is that the PR machine has been churning out this material for years, both promoting AND bashing the real estate market, depending on the publisher’s interest. Don’t be fooled and stick with reasonable assumptions.

  • Jonathan

    Don’t forget excise tax…

  • Jonathan

    Don’t forget excise tax…

  • Jonathan

    Don’t forget excise tax…

  • http://twitter.com/mattgoyer mattgoyer

    Looks like it got caught by the spam filter. I’ve marked it as not spam, should be visible now!

  • http://www.urbancondospaces.com JR | UCS

    Phil, you speak the truth. Simple economics always prevail. Supply & demand. Period.