To Buy or to Rent?

by Jay on January 25, 2010

I am taking a four-day weekend off from work, and swore that I wouldn’t touch a computer for the entire time. I managed to hold out for three days, but today couldn’t resist catching up on my favorite blogs, on the news and on the financial markets. It’s been pouring outside all morning, I’m drinking a pot of tea, my cat is curled up on the desk beside me, and I’m not about to leave the apartment. In fact, this is a perfect time to do some writing.

It’s been a while since I’ve posted. A lot has been going on. I wrote a few weeks ago that I will need to move before the end of March (lease is ending). I’ve been out looking at apartments and have been amazed at how much cheaper they are than they were a year or two ago. An article in the NY Times this morning states that NY rents are 25% off of their 2006 peak, and have fallen back to where they were in 2000. It’s a good time to be looking for a rental!

But instead, I’m on the verge of buying an apartment. I’ve paid off my debt, and feel secure in my job for the next year or so. I also have been doing well with my side business. While I have loved living in my rental apartment with a big garden for these past 23 years, I am acutely aware that I could have paid down the majority of a 30-year mortgage in this time. Also, I am not getting any younger, and don’t want to be renting when I’m 60.

The place I am looking at is a two-bedroom condo in a brand new building with floor to ceiling windows, and a balcony. I’ve made an offer on it and am working out a few kinks in the contract with my attorney before signing.

There are drawbacks to buying though, and I am nervous. First, I will have to take most of the down payment out of my 401k. I understand how the stock market works, and am pretty good at moving in and out at opportune times. I sold in early 2008, and was in a cash equivalent account for most of that awful period when so many retirement accounts were getting decimated. (if only there were an inverse (short) fund offered in my 401k program.) I moved my 401k funds back into small caps and emerging markets funds a few days after the low in March 2009, and have done very well over the past year. By tying $40,000 up in a down payment, I won’t be able to work that money in the markets anymore. Not to mention the fact that I will have to pay taxes plus a 10% penalty on it.

Then there is the problem of a falling real estate market. NY condo prices have come down a good 25% in the past couple years, but with the government about to end its support of the mortgage markets, and with all those Alt-A and Option Arm resets about to hit who is to say that prices won’t come down another 25%? If that happens I’ll be under water on my mortgage by about $100k. On the other hand, I have never seen so much angst in New York City in my life. Angst about real estate prices, about the job market, about the financial industry; people are nervous. If there is one thing I’ve learned, it’s that one should buy when everyone else is afraid to (and sell when everyone else thinks you’re a fool not to buy).

Lastly, I see myself staying in the city for at least another five years. And when I leave, I would most likely want to rent out my condo, keeping a foothold in Brooklyn regardless of where I end up. Of course, with those plummeting rents, I don’t think I’d even be able to cover 3/4 of my monthly mortgage and maintenance…..

So, in another day or two, the contract will be ready to sign. What do I do — take a big risk, bite the bullet, buy a new condominium and become a middle-aged home-owner worried about my housing equity? Or do I put off my decision, sign another 2-year rental lease, and buy once the mortgage reset mess is behind us in 2012?

{ 3 comments… read them below or add one }

Paul January 25, 2010 at 8:52 pm

Hi Jay, I’m glad you posted again. I like reading your musings. Hey, congratulations on paying off your debt!!!!

I’m risk adverse; so, I’d wait 2 years. If I were in your position, I’d be uncomfortable without some kind of cushion if I got laid off. But I’m risk adverse; so I miss a lot of opportunities, but life is not without some risk. It seems like this is an opportunity and isn’t unreasonable.

Daniel February 25, 2010 at 4:46 pm

Hi Jay, Im glad you’re blogging again.

If you currently have favourable conditions to buy, then I’d say go ahead, because you never know if tomorrow’s conditions will be as good as today’s. But hey, it’s your money, and I hope you get a good deal and be happy with your final decision.

Big hug and good luck.

Tammy April 28, 2010 at 8:43 am

Hi Jay,

I would rent, rent, rent!!!! I am stuck in an interest only mortgage and have been turned down twice for a modification. My house is only worth $8,000 more than my mortgage, can’t refinance because there is no equity and can’t sell becaue I would wind up OWING money. The dream of owning a house is now a nightmare. If you do decide to buy I would suggest you investigate the type of mortgage you are committing to before you sign ANYTHING! Get a good attorney to look over the terms before you make any decisions. Good Luck. My thoughts and prayers are with you.

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