I’ll Buy a House When You Stop Asking Me!

There was a little party at our place a while ago. Every time we have a party we get asked at least a few times “when are you going to buy a house?” I never really have a solid answer. There are just so many reasons. From now on my answer will just be “when we have a good reason to.”

One of our friends who seems especially interested on knowing when we will buy a house, just bought a house in Calgary with her boyfriend. We surprised that they bought a house together before they were married (or even engaged) but to each his own. I was told by mutual friends that their reasons for buying a house were 1) because they were tired of and/or hated paying rent (but they were dying to pay interest?) and 2) they bought it as an investment (the other past investment they have made is in a pyramid scheme). Wow, solid reasons there. They just bought the house 3 months ago, emailed everyone about it, and the subject line on the email was “House Owners!!!!” Reason 3): desire to be “home owners.” So they bought it 3 months ago and she was pleased to tell us about how they bought it right before the market “really took off” and that the house had already gone up by $35,000. I just kept my mouth shut, not bothering to mention that the market has been gang-busters for the past several years and the fact that it has gone up in value means nothing unless you realize that value. Not only that but it means absolutely nothing unless you take your gains in real estate and invest it somewhere else, downsize to a smaller place, sell it and rent somewhere, move to a different city, etc… because presumably if your house went up by $35,000 so did all the other houses like yours.

Buying a house under their circumstances as an investment is about the stupidest thing you can do. Think about it, they were paying rent in a 1 or 2 bedroom apartment and are now mortgaging a 3 bedroom, 2 bathroom house with a 2-car garage near the end of what could be described by some (by some I mean many) as a real estate bubble. How much more money are they paying in interest right now compared to how much they paid before in rent? Well I can tell you for a fact that their house was in the $300k range. I have no idea how much of that they mortgaged but their monthly expense could be at least $2000 and their former rental was probably ~$1000. If you do a long-term analysis (I just did a quick one on a spreadsheet) they could do just fine and be no worse off than renting and stashing the extra in the stock market. But could they do just the same at the same risk? Things could turn out very badly too…

This is a blog focused entirely on the real estate bubble as it unfolds in Calgary called the Calgarian Contrarian. He wrote an article at the end of May called “Huge Price Increases and Market Psychology.” He mentions the Calgary Real Estate Board’s website that lists current inventory (see “active listings”) and that

. . . if you want an excellent predictor of timing, continue to follow the inventory situation. . . Right now we are just below 2000 active listings, which is extremely low by historical standards. If you see that number start to climb back to “normal” levels of between 5000-6000 you can expect prices to slow down or even begin to drop slightly. As the number goes much above that level, you should see prices begin to decline. That is the pattern we have seen in many US cities. Once a bubble market exhausts itself, there is a rapid climb in inventory levels, followed by prices beginning to decline.

Interesting. The inventory has climbed to 3,600 since his May article. He has a chart of historical inventories in Calgary here. Something is definitely out of whack there and will undoubtedly swing back the other way.

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17 Responses to “I’ll Buy a House When You Stop Asking Me!”


  • Good article. I have stayed out of the market for this very reason. I will only buy when everyone is selling. BTW is there any blog which gives the inventory levels in Toronto ?

  • She doesn’t need to sell in order to realize the $35,000 paper gain. A dollar saved is a dollar earned. Had she purchased the house now, she would need to borrow an extra $35,000 on her mortgage and use after-tax dollars to pay for the interests on it.

    I do agree with you that the risk is high in real estate.

  • Silverm, ah good point. She bought the house for less than she would have had she bought it now (and her interest rate is probably lower). So she saved. But since you’re speaking hypothetically, I’ll give another hypothetical example: what if prices had gone down by $35,000. She has a paper loss. She couldn’t predict house prices when she bought so I don’t think we can say she “saved” or “lossed” anything.

    In my mind I assumed that any recent gains (in 2006 let’s say) will evaporate by next year anyways. In other words, the $35,000 paper gain is just that, a paper gain. Should prices fall by $70,000 by next year, it’s a paper loss. I don’t think anyone should ever say to themselves “this stock/asset I purchased has gone up by 100%, I am $XX.XX richer.” You can say that when you sell, not before.

  • >>”I don’t think anyone should ever say to themselves “this stock/asset I purchased has gone up by 100%, I am $XX.XX richer.””

    Why not? If you don’t believe me, try selling selling and buying back the same stock at market price (ignoring taxes and commissions for now). Are you now $XX.XX richer? According to your definition, yes since it’s no longer a paper gain. Your before and after networth is identical, so why are you richer now? Richer than what?

  • Sure, for a net worth calculation, I’m not sure how it is done in practice but I would assume there part of the asset would be the book value and another part would be sort of like an “unrealized gain” or some sort of thing. If you were a business and had to report such things, yet paper value becomes very important. And yes, we like to know our net worth sometimes. When I am 55 I want to know my “paper” net worth so see if I can retire not or if I have to work for another 10 years.

    My point with the house situation was this: in the stereotypical situation I think a lot of people enter the housing market at a certain age and then they never leave the market, in many cases they die with a fully un-mortgaged house in their possession. So my point was that when you fit this sort of mold, like I think my friend does, the fact that your house went up by $35,000 doesn’t really mean much and it’s nothing to brag about. If you’re just going to be moving from house to house in the same city until you die it’s not going to make a huge difference since I’m assuming all other houses went up by the same amount. People who sell their homes at every market peak and rent until the next right-time-to-buy probably have more to brag about.

    I admit there are probably holes in my logic and I think you are right as well. I just think that people get way too excited when their house value increases (and I’ve been hearing this kind of thing a lot in the past few years as I’m sure we all have). I would be much more excited if I owned a stock that I had bought on margin that just increased in value by 100% over the past 2 years and I was able to easily cash out. :-)

  • I sense that we’re going in circle. Just to be a little more systematic, your friend is comparing 2 scenarios: renting and owning.

    Renting
    –> no appreciation
    Owning
    –> $35,000 appreciation
    –> There’re no rule that says she can sell and go back to renting. She can pay the commisions and still net at least $20,000. This is her bragging right. She’s $20,000 ahead of the renting scenario.

    The way to build a lot of wealth is to invest and stay invested. If you sell your home, you might stay off the market for a while, but eventually you want to come back in. If you sell your stocks, what’d you do with the profits? You buy more stocks. Profit is profit, doesn’t matter if it’s from real estate or stocks.

  • Well with renting there is appreciation if your rent is less than your mortgage would be (a penny saved is a penny eared as you said). About selling a home and going to back to renting I have never heard of anyone actually going through with that, although my sample size is very small.

  • I don’t have much to add to this thread, so it’s a logical point for me to summarize my positions here and move on. It’s been an interesting discussion.

    I agree that rents are cheaper than costs of home ownership at this stage of the real estate cycle. No argument from me here.

    I also believe that home owners with “paper” gains are real because they have the “option” to realize it. Whether they physically go and realize the gains is irrelevant. I call this a “happy problem”. If you want to find people who sold their homes for profits in anticipation of a correction, go to http://www.realestatetalks.com.

    Paper gains are real as long as you can liquidate your entire investment at market price. Ignoring paper gains implies that your initial purchase price somehow matters, but it DOES NOT. If John Doe bought a tech stock at $100, while his twin brother bought the same tech stock after the correction at $2, John is $98 poorer than his brother, whether the loss is realized or not. John can wait until the stock goes back up to his initial purchase price, but that doesn’t matter. He’s always $98 poorer than his brother.

    Your friend has the “option” to sell her house and be in the same position as you except with $20k+ more in her bank account. Maybe the market will correct. Nobody knows, but until that happens, without a doubt, she’s ahead of her peers. That’s her bragging right. If she decides to keep the place, she has the peace of mind of a $35,000 safe cushion and probably a low locked-in mortgage.

    Do you know why I know I’m right? Because given the choice, you wish you’re in her position.

  • I’ll just respond to the last comment. Of course I would rather be in her position because for me I would probably do everything in my power to sell and rent for a while (if possible, it’s not always that easy obviously). I don’t think my friend has any intention of selling any time soon, nor would they take equity out of that home so for them they are in it for the long term and the recent blip won’t have a big effect.

  • Can’t resist a comment or two.

    1. While real estate gain in your own home is ‘paper’ until you sell (as are all unrealised profits), you CAN realise it without selling – just get the house reappraised and borrow against your equity. A home equity loan is just about the cheapest finance you can get for gearing – at least 1% less than any margin loan you’ll find

    2. Yes, renting is cheaper than buying – in the short term. As your home loan is based on the amount borrowed, it will stay roughly constant over time. While your rent will increase with inflation… Compare your friends home loan payments with what rent will be costing in ten years time.

    3. While most home owners probably won’t sell their house, the main benefit will be that in their retirement they will have paid off the loan and have minimal housing costs (just repairs etc.) This will put your friend WAY ahead in her ‘golden years’

    4. Don’t forget you compare rents to the Interest only part of a P&I home loan – the principal repayment component of her payments are just shifting her assets from her bank account into home equity – doesn’t affect her net worth at all.

  • ralph:

    1. True, I kind of glossed over that (by glossed over I mean ignored)
    2. Excellent point about short term vs. long term. In addition to the inflation argument, can we also say that in the short-term the home buyer is paying a lot in interest and very little towards the asset and near the end is putting a lot towards the asset?
    3. Good point (kind of…). However, if I have been saving a lot towards retirement right now and my friend hasn’t been saving any, then while she won’t be paying mortgage payments in her golden years (and I might), she will be putting a lot of money into retirement savings (and I might not have to). In the end doesn’t it just depend on who had the higher IRR (including all cash flows, towards housing and retirement) once you turn 65 (or whatever). Or more simplisticly, who had the higher return on their investment. If housing prices move with inflation over the next 40 years and my stocks and bonds make 8% ABOVE inflation I don’t see how I could go wrong.
    4. Right, however, the interest changes over time, so it gets complicated, and any increases in her home’s value do affect her net worth.

  • ralph:

    I just ran through some more scenarios in this little rent vs. buy calculator and you can see (when the variables are set right) how real estate can perform better than other investments but in the long term. Although there is still the fact that I think people often don’t tap the equity in their homes before they die (at least my grandparents haven’t) and instead just spend their retirement savings and/or pensions. I think there’s certainly a lot more safety in putting some money into a home and having that home to live in when you retire (or having a home that you can sell when you retire) rather than counting on your other investments being able to cover your rent and/or mortgage payments when you’re 65. :-)

  • Just going through the archives and I can’t resist a comment: I agree with Dave on this one, while technically any profit in something you own is a profit – the profit you make on a stock can be realized and you can (eventually) use it to pay for something, utility bills, tv, dinner etc. With a house – you just can’t do that very easily unless you downsize or move to a cheaper area.

  • “the profit you make on a stock can be realized and you can (eventually) use it to pay for something, utility bills, tv, dinner etc.”

    Without a house, your stock profits would have to cover your rents annual increases.

    “With a house – you just can’t do that very easily unless you downsize or move to a cheaper area.”

    No need. With a house, you realize the profits by not having to pay rents and increases. A dollar saved is a dollar earned.

  • Interesting points – from your comments it sounds like a house will pay increasing dividends which will cover the alternative rising rent costs. This still doesn’t necessarily make it a good investment though if the dividend yield is not high enough to make it worthwhile. The reality is that there are scenarios where a person would be better off just renting and investing the difference between the house costs and the rent.

  • There are scenarios that work either ways. All I’m saying is that you don’t have to sell your home to realize profits. You’re realizing it every month by rents saved and you protect yourself from future rent increases.

    Don’t forget that you pay rents with after-tax dollars. So, you rents saved are amplified if you calculate yield in pre-tax dollars.

    When you sell stocks, what if the profits can’t cover your rents in the short term? What if you sold at a loss?

    Both stocks and home can be good or bad investments depending on what price you paid for them.

  • I’ll agree with that!

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