Should I buy a home in an area with shrinking population
May 19, 2016 6:44 AM   Subscribe

I may be moving to a tiny community (<2k residents), one where I expect I'll live for 3-5 years. The NYT rent/buy calculator says "buy" in this instance. What they can't factor in: the population of the community has reduced 20+% in the last 15 years. I assume the population will continue to shrink in the time that I'll live there. Is it foolish (from a resale perspective) to buy a home in a community with a shrinking community?

I'll be interested in selling the house 3-5 years after I move to the tiny community, and would not be interested in keeping it as a retirement home or for rental income.
posted by arnicae to Work & Money (18 answers total) 1 user marked this as a favorite
It is possible that in a market like that, homes are sitting unsold for a long time. I would get the stats for that and examine them before making any decisions. You need this data because "shrinking population" alone isn't enough market intelligence.
posted by DarlingBri at 6:51 AM on May 19, 2016 [5 favorites]

It seems renting for you might be the better option. Then you can walk away whenever you want.
posted by amanda at 7:04 AM on May 19, 2016 [10 favorites]

Truly, you can't know the future of real estate. Over a short term, you will be taking the biggest risk. Over a longer term, you are much more likely to get lucky and be able to time the market when you sell. Advantages of owning your own home - you get to do what you want with it, fix it up, not have a landlord, garden as much as you want. Disadvantages - all repairs are on your dime, as an investment vehicle, it may or may not get the price you want when you sell. If it is cheaper to buy than rent in that town then buying may be preferable, especially if you don't have to put a huge amount of money down. In this case, I'd put as little as possible since you don't know how much you'll get for it when you sell.

What are your reasons for wanting to buy in this small town?
posted by amanda at 7:20 AM on May 19, 2016

A couple other questions to consider:

Do you actually have an interest in owning a home? Is this your first home purchase?
posted by paulcole at 7:29 AM on May 19, 2016

I agree that intending to resell in 3 years is usually a "just rent" situation. But in places like that, sometimes there's literally no rental market. Do you know if there even are any places for rent there?

Another thought is, you can look at local real estate listings and see how long things have been sitting on the market unsold. If there are a lot of unsold houses, sitting for a long time, that's not a great sign. (Although you might be able to get one of them as a rental -- if there are no regular houses for rent, might be worth calling some local real estate people to see if they know any sellers who would be interested in a long-term renter.)
posted by LobsterMitten at 7:43 AM on May 19, 2016 [12 favorites]

Why is the population declining so quickly? Is it aging? Brain drain? Drug overdoses? Explosion at the nearby nuclear power plant? That's information that's helpful to know.

I was going to say a bunch of other stuff, too, but on preview, LobsterMitten said everything I wanted to say.
posted by kevinbelt at 7:47 AM on May 19, 2016 [1 favorite]

I'll be interested in selling the house 3-5 years after I move to the tiny community

Calculator or no, this alone is a reason to rent instead of buying.

Let's say you put $X down on a new house, and your mortgage is $Y per month. After 5 years, you'll have paid $Z = $X+($Y*20)

If you rent, you'll pay $W per month, or $V = $W*60. $W is probably higher than $Z

The difference between $W and $Z is the minimum amount of money that you are paying as a hedge against not being able to sell when you want to. Yeah, maybe you'll be socking away equity if you buy, but that equity is only good for something if you can sell.

I'm a big advocate for home ownership, and if you were planning on staying at least 10 years, or if the demographics of the community you were moving to were different, I'd say go for it. But I think that given what you've told us you should rent.

And hell -- maybe you'll fall in love with tiny community, and maybe you'll find a perfect fixer upper on a plot of land that you really love there. Since you'll be renting, you'll have the flexibility to leap into that perfect house if it appears.
posted by sparklemotion at 7:49 AM on May 19, 2016 [18 favorites]

Do not buy! This is a recipie for losing money.

You are probably going to lose money in a house you only occupy for three years because of selling and buying costs on top of changing the things you really don't like.

You are probably going to lose money in a market (compared to investing) with a shrinking population.

Invest in stocks and bonds.

This is a super easy no. I wouldn't even consider it.
posted by Kalmya at 7:50 AM on May 19, 2016 [8 favorites]

In the first few years of owning a house, you'll only be paying off a few thousand dollars of principle a year. That may easily be offset by repairs and maintenance costs. If property values sag with people leaving (which they likely will), you could easily end up underwater on the property.

I'll be interested in selling the house 3 [years]

That's a very solid nope.
posted by Candleman at 8:27 AM on May 19, 2016 [2 favorites]

The NYT calculator is good, but the fact that it still says buy after you've put in the details means you probably are not factoring in the depreciation correctly. A shrinking community almost by definition means that housing prices are going to go down over your time span. So if you factor that in, I'm sure the calculator will tell you not to buy.
posted by thewumpusisdead at 9:13 AM on May 19, 2016 [1 favorite]

When you used the NYTimes calculator, did you pull the "Home price growth rate" slider all the way over to the left, assuming 5% depreciation, and did you assume rent will also stay level or go down over the course of three years?

That said, I think the thing you need to worry about the most is not depreciation, but rather being stuck with a house that no one wants to buy. In most markets, you can sell pretty much anything if you price it low enough, but you'll have to be very careful to maintain positive equity, because your mortgage holder might not be willing to let you price it low enough if the price you're asking is lower than what you owe them.

You don't want to end up underwater, having to make payments on a house that is continuing to depreciate while you live somewhere else.
posted by mskyle at 9:19 AM on May 19, 2016 [3 favorites]

This is probably a bad idea. This might work out okay if there is some mitigating factor you have not mentioned and you are willing to rent the house out and hold it for a time in order to accrue more equity. A mitigating factor I have seen in some communities: If there are federal facilities in the area and the population shrinkage is due to federal spending cuts. Towns with nearby federal facilities routinely see busts and booms that are almost entirely dependent upon federal spending decisions.

But a) since you say you do not wish to turn it into rental property and b) the town is so tiny that this is probably unrelated to federal spending, this probably has bad idea written all over it.
posted by Michele in California at 10:10 AM on May 19, 2016

You will not make money with a purchase. Small towns losing population are something I'm familiar with. What most locals do is rent the house they grew up in and move up the road a piece. Rents will be lower than the cost of the money to make the purchase because renting in a declining market brings about price competition.

If you want to rent something local ask the High school secretary, she knows everyone.
posted by ptm at 1:42 PM on May 19, 2016 [3 favorites]

I don't know if I disagree with most of the above advice to rent, but I have a slightly different perspective. I think this is, like any real estate investment, a function of what you pay for the house. If you can get a very good below market value deal, then it may be worth purchasing or certainly your downside is mitigated somewhat. If you are paying the going rate, there is much more risk. If it were me, I would look at purchasing but with a very disciplined approach and a willingness to walk away from any special situation or from anything that is less than a great deal.
posted by AugustWest at 8:55 PM on May 19, 2016 [1 favorite]

It would be almost impossible that buying is the right decision here. If you can't sell it, any marginal cost advantage could be wiped out in property taxes and managing a house you don't want in a town you don't live in.
posted by mzurer at 7:50 AM on May 20, 2016

There is no financial upside to doing this.
posted by yohko at 11:08 AM on May 20, 2016

We are not sure what the community is like - is there a university? Do people buy summer homes here? The population is decreasing but are the buying opportunities decreasing? Are the home prices staying steady? decreasing? or increasing? How long are homes sitting on the market? Did the population decrease because a major employer left the area? Are new major employers coming in?

My other question to you is - what is the rental market like? Would it cost you significantly more to rent than to buy and resell at a loss?
posted by mutt.cyberspace at 2:09 PM on May 20, 2016

My parents own a home in a community like this which they cannot sell, due to a glut of houses available in a shrinking community. They did not intend to rent it out but they are so relieved to have found renters after the house had been on the market for two years.

Rent. Even if there's no signs up, go to the houses that have been on the market for a while and inquire.
posted by sadmadglad at 7:49 PM on May 21, 2016

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