Buy a home, make no money
April 26, 2005 11:53 AM   Subscribe

Does it make any sense to buy a home if you won't be able to get any equity from it for 30 years?

Housing costs in my area are insane. There's a county program in which builders offer a certain number of new units at a discount price if you meet the maximum/minimum salary requirements. As an example, they offer one bedroom condos that sell at 400-500k for 150k. However, the programs controls don't expire for 30 years, so if you want to sell it, you have to sell it back to the county (presumably for more than you paid for it, but obviously far less than it's worth), you cannot rent it out, and the only equity loan that you can get is based on the county's resale price. If you stay for 30 years, you can make a mint, but how often do people do that?
posted by amarynth to Work & Money (16 answers total)
For analysis purposes, you can treat it like a place that is worth $150k. The real value is almost irrelevant, since most people don't stay in a house 30 years.
posted by smackfu at 12:03 PM on April 26, 2005

There is about a 1% chance you'd stay there 30 years, assuming you're anything like the people I know. Which means there's about a 99% chance you'd get screwed on this "deal."
posted by suchatreat at 12:11 PM on April 26, 2005

Why is she getting screwed? She gets to own a really nice home that she wouldn't otherwise be able to afford. She gets to sell it at a profit - even if it's a small one. The alternative is to continue to pay high rents, I assume. She'd only be getting screwed if..... I don't see how.

Of course the county gets to buy it back reduced, the idea is to provide affordable housing for people. The 30 year rule ensures that the housing remains affordable, otherwise someone would buy it at the cheap price and immediately sell it for the profit.
posted by dpx.mfx at 12:16 PM on April 26, 2005

Well, "equity" really matters in two totally different ways:

1) Really taking out out the cash, by selling: What are home prices doing--and likely to do--in your area? In many regions, it's no secret that home prices are basically going to plateau or even nose down soon. Not that there's necessarily a huge bubble pop going to happen, but the 10/20 year gain in a lot of areas may be disappointing compared to recent history. Also, find out what kind of formula the county's going to use to determine the price--you might not be missing out on all the equity you think, compared to a "free" market.
Also, how attractive is the home, for you? Even if you don't make a profit, you could conceivably live in a very nice place, effectively rent-free. It may not be as attractive, financially, as owning it outright and selling it for a tidy profit, but it still could be a lot better than paying rent, investment-wise.

2) Borrowing against home equity with a loan: Why would you actually expect to borrow against the home's equity? Tapping into your "new" home equity is something that's frequently done for all the wrong reasons--remember that you're not really taking the equity out of your house, at that point. The lenders are really just agreeing to loan you _more_, and they _never_ do that to your advantage.
Basically, the rule of thumb is that if you really _need_ to take out a home equity loan, then you almost certainly shouldn''s _not_ a safety cushion. The day you take out that second loan, your monthly payments go up, probably dramatically, and if you needed the loan to get out of a hole, now you're digging it faster. (I'm just talking hypothetically.)
Ironically, home equity loans make the most sense when you _don't_ need them--they're an attractive option for people with enough liquidity that they could save the money themselves, but don't want to wait. So yes, having a reduced line of equity credit would make it harder to re-do the kitchen in 10 years, but if you're living in a house that you were already able to buy for 30 cents on the dollar, and are already that much further ahead of the game, isn't that maybe a legitimate trade-off?
posted by LairBob at 12:21 PM on April 26, 2005

I believe people live in a home on average for seven years. That said, I don't know if the average can really provide guidance to you. You have to look at the circumstances in your life and decide how much of a time committment you think you can make.

I'm a little confused about the program you described. Assuming you purchased a home and wanted to sell it back to the county three years later, how would they determine the value? Would it be based on the discounted price you paid times the average rate of appreciation in your neighborhood? Or would they use comps and then apply some kind of discount?

In the first example, say you buy the home for $150K and the average rate of appreciation in your area for condos is 13% annually. In three years, your home, based on the discounted price you paid, woud be worth about $216,000 and your equity--aside from any down payment you made or principal you paid--would be about $66,000.

In the second example, if the condo was worth $450,000 when you bought it, it would be worth about $649,000 in three years, again assuming 13% appreciation annually. If the county bought it back from you at 2/3 off that price--which is the discount you got when you bought--you'd again have a sales price of about $216K.

I would look very closely at how sales prices will be determined in the future. I can't imagine that many people buy a condo with the expectation they will live there for 30 years, so surely they must have addressed this issue.

As for whether this makes financial sense for you, it depends. The interest you pay on your mortgage is tax deductible so, depending on your situation, the mortgage may cost significantly less (like 20%, say) adjusted for taxes. (Just avoid paying PMI--private mortgage insurance--if at all possible. It's not tax deductible.)

Aside from the monthly mortgage payment, there are the assessments you'll have to pay to the association and the general upkeep of the place to factor into your equation.

Ultimately, though, it'll be very hard for you to decide whether this makes financial sense until you figure out how long you might live there and how sales prices will be calculated for discounted units.

I hope this helps. If you do decide to take the plunge, you may want to look into a 5/1 ARM, which has a lower rate of interest that a 30-year fixed. Generally speaking, 5/1 ARMs beat 30-year fixeds on interest savings up through the ninth year of homeownership.
posted by Sully6 at 12:25 PM on April 26, 2005

dpx.mfx -- because he said "presumably" for more than the $150K paid for the house. Even if you can sell it back for the same amount, you've lost because you have paid interest on your loan while you've "owned" the house.
posted by suchatreat at 12:28 PM on April 26, 2005

If the principal+interest payments are about the same as rental costs, then you lose nothing by selling it back for what you purchased it at. Indeed, you gain, because in effect you only paid the interest amount as living expense; you get your principal back.
posted by five fresh fish at 12:33 PM on April 26, 2005

suchatreat, It depends. Say amarynth buys the place and pays $1,000 a month for the mortgage, $200 a month in property taxes, $150 for assessments and $100 a month for homeowner's insurance, totalling $1,450. The interest on the mortgage--which will be nearly the entire payment for the first several years--and property taxes are tax deductible. So perhaps the per month cost, adjusted after taxes, is $1,250. Perhaps that is comparable to the rent amarynth would pay to live in a home of that quality in that neighborhood.

amarynth might also possible stand to make money on the sale, depending on how the county assesses value of the discounted units. That's what he/she needs to figure out, along with--as others pointed out--the health of the condo market where he/she lives to consider this option.
posted by Sully6 at 12:39 PM on April 26, 2005

The purpose of this program is to create long-term affordable housing, not to create wealth or savings. I would approach it on those terms. If this is a place where you would be happy to live for a number of years, and if the monthly payments plus the up-front costs amortized over your expected residency make sense, then I'd say go for it.

I would not purchase it with the expectation of staying there for 30 years and then making a killing by selling it for a gazillion dollars. It's unlikely you'll stay that long, and you might just make yourself very unhappy by trying. There are easier ways to accumulate wealth over 30 years.
posted by alms at 12:42 PM on April 26, 2005

Thirty year old condos don't have much value anyway, at least right now with so many new ones going up.

Whether this makes financial sense really depends upon how the property will be valued in a sale short of 30 years and what comparable rents are in the area. If you are going to stay for a long time, factor in that rents tend to increase but your mortgage payments will stay the same.
posted by caddis at 1:09 PM on April 26, 2005

offer one bedroom condos

Why is she getting screwed?

She said it in her question especially mentioning that the investment kicks in after 30years of residence. Which is a big factor in the condo community with all the things that are tied into an association. Took years to realize why my neighbors are old or have gray hairs at an early age.
posted by thomcatspike at 1:11 PM on April 26, 2005

Speaking of property tax. How will you reap a profit if for lets say the last 10-year you are paying property tax on 1/2 Million those years. Don’t think the association can control your tax rate.
posted by thomcatspike at 1:15 PM on April 26, 2005

Sorry, see you’re not buying a condo, it was an example. Think anything locked in over time is bad. It's a gamble since you have no options during 30 years to make a turn around profit. That time is long; how old are you?

People that I know who profited multiple times through home purchases did by renting out and or selling the property after a short ownership. Make what you will from that.
posted by thomcatspike at 1:21 PM on April 26, 2005

One factor not mentioned above is the removal (I think - depends on details of the program) of the downside risk. If the home can be purchased for much less than the market rate, then (hopefully) even if the market price falls 30 or 40 percent, the purchase price is still much less than market. So (again) depending on the program's details, the buyer doesn't have to worry about insane prices collapsing.

And that is a significant thing to worry about. A larger and larger percentage of homes are being purchased for investments, not for owner occupancy. The higher the percentage of investors, the more likely that a bubble will occur (and burst), with the bubble being fed by unrealistic hopes of profits, and the bursting coming as owners try to "get out" before all their equity is wiped out by falling prices. [The Las Vegas real estate market
posted by WestCoaster at 1:22 PM on April 26, 2005

Thanks, everyone.

And alms, very good point. The control period only recently increased from ten years to thirty years, and I had to adjust my thinking, but I was looking at it the wrong way.
posted by amarynth at 10:10 AM on April 27, 2005

Just in case someone has a similar question, and this comes up in a search, here's the email that I got in response to my query on how the calculate resale values:

"Basically, though, we take the price you initially paid for your unit, add the rise in the CPI index for the Washington area from date of purchase until date of sale and add any options purchased with the home and eligible improvements to the home to come up with a resale price."
posted by amarynth at 1:18 PM on May 3, 2005

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