Stimulus Programs: Cash for Buyer’s Remorse?
Published on - November 19th, 2009 (Modified on - November 20th, 2009) (by Adam Baker) This post is from GRS staff writer Adam Baker. Baker, along with his wife and 20-month old daughter, will be spending the next couple of months exploring Thailand as they continue their recent backpacking journey.
Since the start of the economic slump started in 2008, the U.S. government has issued several incentive programs in an attempt to stimulate some positive movement in the economy.
First, came the popular $7500 tax credit for first time home buyers, which was to be paid back in $500 increments starting with the 2010 tax year. Next, they extended the homebuyer tax credit further into 2009, increasing the limit to $8000 and removed the burden of having to pay it back over time.
This past summer brought the controversial Cash for Clunkers program, which then spawned “Cash for Appliances.“ Most recently, the first-time home buyer tax credit has been extended, yet again, into 2010, and expanded to include some who hadn’t previously qualified since they weren’t officially first time homebuyers.
These incentive programs have drawn everything from wild praise to heated protests.
Did Cash for Clunkers bring success or regret?
Recently, the first few months of data has begun to come in from the now-closed Cash for Clunkers program. The homepage of the official Department of Transportation website for the program, CARS.gov, now reads:
The enormously successful CARS program helped consumers who turned in gas guzzlers buy nearly 700,000 more fuel efficient vehicles in fewer than 30 days. By late September the U.S. Department of Transportation paid all eligible and complete dealer transactions. “There can be no doubt that this program drummed up more business, for more people, in more places at a time when our economy needed help the most,” said Transportation Secretary Ray LaHood.
But, not everyone is buying into the “enormously successful” label. A September article published by AOL Autos brings up some interesting facts about the CARS program:
- An August survey concludes that 17% of Cash for Clunker participates indicate they feel buyer’s remorse over their purchases. This is nearly double the traditional rate of 6-8%.
- While the average MPG of the vehicles in the program rose from 16.3 mpg to 24.8 mpg (a clear success), it’s estimated that individuals will be driving even more due to possessing a newer car. This could actually result in more fuel consumption overall.
- The program takes from over 300+ million taxpayers and rewards only a small group of 700,000.
And AOL Autos isn’t alone in the criticism of the program. Just a few weeks ago, Edmunds.com issued a press release stating that taxpayers actually ended up paying $24,000 per vehicle sold through the program.
If Edmunds’ reasoning seems a little too simplistic (I’ll admit it does for me), there’s a more-detailed study by University of Delaware, which concludes that the cost of the program exceeded the benefits by approximately $2000 per vehicle.
Studies, press releases, and government websites aside, I’m worried that these programs encourage people to buy larger ticket items during a time that may be very hazardous to their individual financial health.
The last thing most people need to be doing in a down economy is adding thousands of dollars in new consumer debt. And in the CARS example, the majority of this debt will be on a consistently depreciating asset!
The program is best suited for a financially responsible individual, who was already in the market for an upgraded automobile purchase. But it’s obvious that the majority of the transactions didn’t involve this type of situation. For that reason alone, I have a hard time considering the program a success.
If you think impulsively buying a car is a mistake…try a house!
I have my doubts about the effectiveness of the first-time homebuyer credit, as well.
Over the last three years, I participated in the real estate markets as an agent, property management, and investor. Unfortunately, most of my participation centered around the foreclosure and short-sale markets. I saw hundreds (if not thousands) of individual cases as the housing market went sour. Behind nearly every one of these foreclosures and short sales was a rushed and impulsive purchase several years before. There were only a couple exceptions.
Once again, this tax credit is perfect for those financially responsible individuals and families who are already in the market for a conservative home purchase. I just can’t envision that this is the case for the majority of the claimed credits.
Last year, many of my friends in their 20s and 30s scrambled to take advantage of the original $7,500 credit/loan. A few rearranged their plans or bought a little early to ensure they capitalized on the incentive. Months later, they watched as it was extended to $8,000 and changed to not have to be repaid over 15 years. The same people who were considered savvy for rushing to catch this opportunity, now had wished they had delayed it another six months.
That’s just the point. No one knows what our government or administration is going to do in the future. As a whole, we seem to be letting these programs be a leading factor in our decision instead of just a bonus. I don’t know many people who, looking back five years after a home purchase, would say to themselves, “That would have been a great purchase had we only gotten $8,000 up front.”
$8,000 is a lot of money — I’d love to have an extra eight grand right now — but a home purchase is one of the largest financial commitments you’ll ever make. Rushing into such a huge commitment can end up costing you exponentially more.
It’s about more than just the numbers…
Major financial purchases, including automobiles and houses, are about more than just the numbers.
Of course, we want to take all numerical benefits and costs into consideration. We shouldn’t ignore access to these government incentive programs, but letting them be the leading factor in our decision making process would be a huge mistake.
In your financial life, make sure you are the one calling the shots, not Uncle Sam. And if the timing is right for you…don’t leave any money on the table. Milk him for everything he’s got!
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Thanks Baker. It’s good to know that I’m not the only one who realizes that if I’m not ready to buy a house, it doesn’t matter if there’s an $8,000 credit or not. I’m not ready so I can’t buy a house right now. And that’s ok!
I don’t care whether the housing credit is considered a success or not. The same is true of the CARS program. Some people will always say it was great and some will always say it was horrible. To me that doesn’t matter. What matters is making good decisions at the right time for me and then capitalizing on everything that’s available to me at that time.
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Re: Cash for Clunkers
Not only was this debacle of a program responsible, as you suggest, for purchases that people could perhaps ill-afford as well as inflating the actual cost to the taxpayer, but the economic “stimulus” to the automobile industry didn’t really occur. If one looks at numbers of units sold by month, it becomes clear that in August, the number was greatly increased, spurred on by the program. Great, right? Not so much. In September, the number of units sold was abysmally low. One could argue that the only stimulus this program accomplished was to move units from September sales into August. The car companies are still hurtin’, folks.
These interventive programs are the worst kind of boondoggles. The government needs to stay the h3ll out of the free market. Period.
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Thank you! This is one of the smartest articles on the subject I’ve seen to date!
While getting the gas-guzzling junk off the road is a great idea, there are better ways to do it. Instead of taxing a vehicle less and less the older it gets (as they do here in my state), it should be the other way around: the older, less efficient, and less safe the junk is, the more you should have to pay to insure it and to clutter the public highways with it.
The specific reason I hang onto my 10-year-old Sienna, hardly an avatar of energy efficiency, is that the annual registration tax is very low and it costs only about $45 a month to insure the thing, even here in the car insurer’s most expensive zipcode. Turn it around — make insuring and registering a newer car cheap and an older car high — and I would have replaced the vehicle before I lost my job, making any such purchase impossible.
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I don’t come here for politics. I come here for advice on saving money.
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I didn’t think this plan was very good – if the gov’t wanted to help the car companies they should have just given them some money directly (oh they did that too?).
The program is best suited for a financially responsible individual, who was already in the market for an upgraded automobile purchase. But it’s obvious that the majority of the transactions didn’t involve this type of situation.
How do you know this? If you read debt reduction blogs all day it’s easy to think that everyone is in dire financial straights. The reality is that there are a lot of people who do have their finances in order.
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My dad went from owning a 1998 Dodge Intrepid with $0 payments to a 2009 Ford Focus with $400 in payments. His insurance also doubled (due to adding collision). I’m not saying that he cannot afford the payments, it’s just that it was a BIG jump financially for just a little reward. His other car was still running fine yet the CARS program helped him believe that he needed a new one.
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The first time home buyer credit (+ low prices + low interest) is why I bought a house now instead of two years from now. However, the credit pushed me right into the area where I could buy a home. It might not do that for others. I would also like to say that I think we definitely stimulated the economy, we’ve probably pumped about $30k out already into attorneys, real estate agents, contractors, Lowe’s, Walmart, pest control, critter trappers, etc.
I misunderstood what the author said about paying back the credit. To be clear, IRS states:
For homes purchased in 2008, the credit … must be repaid in 15 equal, annual installments beginning with the 2010 income tax year.
For home purchased in 2009, the credit does not have to be paid back.
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The Cash for Clunkers program had many goals. One was to get gas guzzlers off the roads, another was to stimulate the economy. Perhaps, feeding a little money into the auto industry in hopes of a revival was a little far fetched, but it was never an end-all-be-all solution.
Our economy stagnated, even receded, after years of artificial growth fueled by easy access to credit and over spending. One bank failed, another failed, people started fearing, and the stock markets crashed. Now, people are even more afraid and are acting the opposite, hoarding their money.
The economy is something we control, not as an individual, but as a collective. It grew when everyone spent freely, and it shrank when people started to hoard their money. The stimulus is to stimulate the economy, basically a prod to get people to let go of their iron grip on their money. If enough people start spending, then it starts a domino effect into other industries.
“… these programs encourage people to buy larger ticket items during a time that may be very hazardous to their individual financial health.” It was 100 years ago when buying things on credit didn’t exist. Now, credit is a way of life and a way of business. Buying things you can’t pay for immediately is how most businesses start, and continue to run. Their continued business also relies on consumers purchasing their goods and services.
What did this economy do that hurt businesses? First, they took away the credit that businesses need to function on a daily basis. Then consumers stopped purchasing.
Did these consumers finally learn the error of their previous ways, and we won’t return to the glory days of yesteryear? I doubt it, people will probably return to their old habits and see this not as a lesson, but as a fluke.
I said it before in a previous post, and that is that people seek instant gratification. Back when the economy was great, people bought what they wanted for that fleeting moment of happiness. Now, the instant gratification is a sense of security, by hoarding money. The hoarding provides them a feeling of some semblance of control.
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@FP – Articles and studies I have read suggest that the majority of people who took advantage of the trade in financed the vehicles at high levels. Of course, whether ‘a lot’ of these have their finances ‘in order’ is up for a lot of interpretation.
@Lindsay – The $8000 tax credit does not have to be paid back. Last year, the $7500 is supposed to start being paid back in $500 increments starting with the 2010 returns.
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Buyer’s remorse…I think this whole thing is funny (in the very pathetic vein). How on earth has spending more and more money ever helped anything? When are these idiot leaders going to realize the U.S. needs to PRODUCE….SOMETHING…ANYTHING. All we do is consume good and services! Plus, consider the cash for clunkers. What REAL good is it doing by trading in your car, which gets 16 mpg for one that gets 18 mpg? All you are getting, really, it a new car payment for what?….? five, even seven years? I DO blame the consumers. It doesn’t take a college degree to figure out what is going wrong with this equation. Sure, save $7-8,000 and pick up a tab that you owe of approximately $20,000. Really smart.
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lol. You Americans confuse me
I’m glad to know I’m not the only one who was shaking her head at these plans. “You don’t know if you’ll have a job next month, but buy a house or a car for a deal!” — seems like the kind of thinking that caused this mess?
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GREAT Article! My favorite article in quite a while and I think you nailed this issue on the head.
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I would like to clarify that I didn’t rush to buy a home simply because of $8000. It was also because of the low home prices and the 4.75% interest rate I was able to get. Furthermore, we did not buy too much house, and home/mortgage-shopped based on our ability to make the monthly PITI payments with one income. We also bought a home close to a city train station so I can ride the train to work, and we won’t ever need more than one car.
This is not necessarily in response to the author, but in response to some readers who have stated negative opinions of the homebuyer’s credit:
The mortgage lenders I talked to were very thorough in making sure that we could make our payments, and checked our history very carefully, mentioning that they had new, more stringent rules to follow. I don’t agree with the assumption that the homebuyer tax credit is being taken advantage of by the same financially irresponsible people who got ARMs and too much house at the top of the housing market, or by people who are unemployed or on the verge of losing their job.
Now actually is a smart time to buy a house, those who can’t afford it will be prevented by the more stringent rules on lending, plus banks’ new reluctance to lend to people considered credit risks.
Also, while unemployment is high, above 10%, this means that over 80% of people are employed and most are not in any danger of losing their jobs, or else this nation is in danger of coming to a screeching halt. Why assume that the people rushing to get the tax credit are all about to be unemployed, when the majority of people are still safely employed?
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This post reminds me of conversations I’ve had with my mother. She’s said I should buy a house because of a combination of my ample savings and the homebuyer credit. But my fiance and I are very satisfied with our current apartment living and are not willing to pay for the extra costs of owning a house, not to mention the commitment 15-30year mortgage payments. An $8000 incentive is not worth the commitment and costs of owning a house to us at this point when our one bedroom, 900 square foot apartment is good enough for us at this point. I would rather save the money for when we’re ready.
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I began my home search last year, without any knowledge of the tax credit. I know that buying a home is the right choice for me. And while I might not be in the best position to buy a house, I am still able to afford one. I’m not trying to buy anything extravagant, however I am looking for something that I can have positive equity in. I went under contract on a fixer-upper 3 bed, 2 bath rancher a few weeks ago. I originally wasn’t going to be able to close in time for the tax credit, which was fine. I was still going to buy a house. But now that they extended it, it can benefit me personally.
I don’t believe the tax credit is a good incentive to buy homes. I don’t think it properly stimulates the market, thus creating another housing bubble. If it were up to me, I would vote against it. However, since the credit is already in effect, it would be stupid of me not to take advantage of it.
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I read about the cash for clunkers being a failure for different reasons. They said the buyers who took advantage were going to be getting new cars regardless, it wasn’t an impulse buy and would have paid normal price cause they needed a new car. In that way the economy blew a chance at getting more money.
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Great post Adam,
I will try to avoid reiterating what you and everyone else above me has stated so nicely. Ever since they started the buyer incentive programs, I have said that it is just a smoke and mirrors magic show. As Betsy pointed out, it possibly just robbed sales from a future time frame to the current. And how can anyone possibly say that trading in a car with 0 payments and low insurance for one with large payments and significantly larger taxes and insurance is a good thing for most consumers?
I grew up in a very small and poor town, where almost every car/truck on the road was brand new. I would pass mobile homes where the siding was falling off, and windows were broken, but there was a shiny, brand new camaro or mustang parked right next to it. These programs are just helping to promote that same type of crap that got us in this economic mess in the first place.
I am really scared to see what is going to happen in the next year or so regarding the government’s continued involvement in our
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I think the Cash for Clunkers program was a joke.
I heard stories of local dealerships paying out for 300 cars, and only receving money from the govt. for one or two.
I think it hurt the economy if anything.
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at the end of the day, you can’t protect people from themselves. Last I checked, everyone still possessed free will–if an $8000 carrot convinces people to buy a home they can’t afford, do we blame the government for that?
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Well, we didn’t buy into the hype and hysteria and we still happily drive our two paid-for cars and plan to live in our nice, little house for a few more years.
Unfortunately, my brother-in-law and new wife just couldn’t resist. They just got married a few months ago and they will break ground on a new house in a couple of weeks. I told them it wasn’t the best decision (despite the gov’t credit that has them seeing dollar signs) and encouraged them to read my post on newlywed home buying.
They did read it, but didn’t take it to heart and so onward they march into major debt that will undoubtedly add stress to their marriage!
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My husband and I were in the market to buy our first home for the family. We shopped, we purchased, we closed in February of this year. At the closing, the agent mentioned something about some people putting the purchase on their taxes, or that we could amend ours because we had already filed in January…We were CLUELESS about what she was talking about.
We moved and got settled in and did some more research. BONUS! $8000, which is going directly ‘to the economy’ for upgrades/updates on the house.
Our mindset going in was to purchase at a level WE were comfortable with, not what the bank was comfortable with. We got pre-approved for a loan, then set our spending limit about $25,000 BELOW that to stay within our comfort zone.
I would like to downsize our vehicle at some point, too. However I was not even in the market for a new one at this time, so didn’t really pay attention to the Clunkers program.
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I keep seeing that so many people who bought a new car under Cash For Clunkers added debt. I know 3 families who participated in this program. All 3 traded up in fuel efficiency (meaning their new car was more efficient) and all 3 families paid cash for their new cars. Now I realize that’s a small sample size, but I know a few people who didn’t take advantage of the program who were eligible, but they felt they didn’t have the money to acquire a new car.
As for a house I don’t know anyone looking to buy right now. Besides, at least in my area, the bottom has passed – it was last winter. We bought at that time (we were relocating). I felt as if they were giving away houses. Now I don’t think there are as many good deals out there and it seems there are even fewer good homes out there for sale. The good ones get snapped up pretty quick.
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I agree it’s pretty silly to make a huge purchase like this “just because” there is a government program subsidizing it. It’s one thing if you’re planning it anyway and take advantage of what’s out there, but just like using a coupon to buy something you normally wouldn’t to “save” money, these programs took that silly idea to a more expensive level.
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On Cash for Clunkers:
I live in Texas. Not for a moment did I (or anyone else down here, for that matter) believe that people in this state would trade in their pickup trucks for more fuel-efficient cars. And they didn’t: my local newspaper reported (about a month ago, I think) that there were many instances of people trading in their trucks for…you guessed it, newer trucks.
Honestly, it peeves me a little that my taxes went towards this program. Cash for Clunkers struck me as more of a bailout for those infernal American automakers than as a program for getting polluting vehicles off the roads.
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I’m with Doughboy. I’m looking to get rich slowly. How does slamming a now-ended government program and a soon-to-end government program get me there? I’ll check back tomorrow.
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Folks (particularly, Doughboy and Suzanne): I’m pretty sure Baker and I are diametrically opposed on politics. All the same, I didn’t feel like this was a political piece. It’s not espousing a political viewpoint, or touting one administration over another. Instead, it’s focusing on the personal implications of a government program with a sort of overall libertarian air.
GRS doesn’t do politics, as you all know. And when it does, it’s only to focus on the personal finance stuff. Like buying a house you can’t really afford just to get a tax credit.
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I sat on the fence for a long time trying to decide if all these government incentives were a good idea or not.
Are they going to save us from a “lost decade” like Japan had or send us deeper into a financial coma? Are they going to bring us back to the “prosperity” we were previously experiencing or would our post-crash lives continue as usual?
I’m hardly the only one with these uncertainties and I think that’s why most of America just shrugged it off. The problem and solution feel too complex to trouble our every day lives with, so we ignore it, leaving it up to other no smarter than us, but more willing to deal with it.
Did they get it right? I’d argue its far too soon to tell.
The only thing I know for sure is that Adam is right. Buying something you don’t need and can’t really afford just because someone gave you an incentive to do so will never be the right personal choice and it certainly won’t fix an economy.
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Great article. The point is no one should buy something because it’s on sale. It doesn’t matter whether the sale is created by the retail sector or the government. If you are not in a financial position to be able to make the transaction work, you shouldn’t buy it. Doesn’t matter if it is a washing machine, a new TV, a car or a house.
At least for many of us, we’ll be able to benefit from the cash for clunkers program when all the people who bought cars they couldn’t afford get repo’d. That’s when I’ll start looking for a slightly used newer car.
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Its only a deal if you NEED it. As simple as that.
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No worries. Actually a fan of ManvsDebt as Baker knows, as well as GRS. There’s just so much emotion out there around the various stimulus packages that we can see by some (not all) of the responses here people end up expressing views on the program and not personal finance.
I’m all for the discussion about how a person can get blinded by dollars offered and get themselves off track of their financial goals.
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I think the $8000 tax credit is a ridiculous joke personally, but that’s because I live in an area where an average house is still priced around $600,000.
Yeah, like I’d rush into a half-million dollar purchase because of a 1.3% discount.
Prices fluctuate monthly by more than that.
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@Suzanne & Doughboy (who probably won’t read this), I agree, I read GRS for the financial information and not the political information, even though the two are seemingly inseparatable at times. However I don’t think that was Baker’s point. The last section Baker wraps up his point by stating “… letting them be the leading factor in our decision making process would be a huge mistake.”
That’s the point of this post. The rest(for simplicity’s sake) is supporting examples. It seems that it is nearly impossible to talk about two highly political programs without bringing in politics slightly. These are relevant examples that illustrate a very important point (or points).
Some of the comments are going to have a political slant to them. But this isn’t the fault of Baker (or JD for that matter). JD’s tax series is similar in that it describes something that is, by it’s nature, political and discusses the financial implications. I would defy you to look at the comments and not find some that are bent to one political side or the other. That is the nature of blogs and people in an information saturated culture. That does not reflect on the quality of the blog or it’s authors, just on the people that leave comments. We can learn more by looking at things in terms of the whole picture instead of just certain parts that we agree or disagree with.
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Most of the Government financial programs are NOT consistent with principles of successful personal finance. Too many quick fixes (going back several administrations – not any one person). Very much akin to transferring balances from credit card to credit card. Working taxpayers are getting stuck with the ever-growing bill! I wonder if JD can produce a tax rate by generation chart? Would be interesting to see how progressive generations are being taxed more.
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@Tyler: Yep, I’m in the same boat as you here in N. County coastal San Diego. I’m renting a house for less than half the carry costs I would have to own it.
The good news is that the upper-end market is about to crash hard in California. A lot of foreclosures in the pipeline are higher-end houses. $1M+ coastal seems to be just about 2 years behind everyone else in the crash. And this crash could go on for years.
In the meantime, I’m saving up for a down payment. I’m putting about $80,000/year away — it may be enough for me to buy a house with cash in 8 years or so. I just have to be patient.
-Erica
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I know a lot of people who took advantage of the homebuyer credit. I think they were all on the verge of buying anyway, and it was really the low interest rates that drew them in. The credit was just “bonus”.
I don’t know anyone who used the cash for clunkers program. It never seemed like that good an idea; why trade in a car that runs and is paid for? My husband would have liked to get a new car but ours is too efficient; we couldn’t have found a car we could afford with sufficiently higher mileage. I’m glad of that, as I really don’t want a car payment right now.
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“for those financially responsible individuals and families who are already in the market for a conservative home purchase.”
That’s the real point – that these programs shouldn’t have any effect on rational individuals. If that’s how it works, then we’re wasting taxpayer money. If that’s not how it works, then we’re encouraging irresponsible behavior. Either way such a program is worse than useless.
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we bought a house we could afford in 09 and got a great rate (4.85%). the bonus was instant cash back up of $8000 which is now reserved as our emergency fund.
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Anecdotally…
I will say that my FIL who works in an auto-supporting industry saw his company be able to rehire some of the laid off hourly workers, stopped asking him to work for free on weekends (as a salaried person) and dramatically increase production orders. He attributes that to Cash for Clunkers, though he worries that things will go back to the way they were or worse if the economy doesn’t improve. Still, it provided a much needed income boost to these industries, even if only temporary. Hopefully it allowed people working for them to save and plan a bit before the next shock.
My sister recently bought a house… one that she can afford– well technically one that she can afford plus about 6K that she really shouldn’t be paying under normal circumstances, but can because of the stimulus money. Without the stimulus it would have taken up to a year longer for her to buy and she would have paid less… possibly quite a bit less if interest rates had gone up in the mean time. She’d been thinking about buying for a while but the stimulus combined with her roommate moving out pushed the decision.
I have seen a lot of news stories, but not a whole lot of solid empirical work on whether or not these programs had their desired effects. I think partly that’s because it will take some time to see how much intertemporal substitution was going on.
In terms of buyers remorse… there’s always buyers remorse. People are always buying more car or house than they can afford (and certainly more than they can pay cash down). I wonder how much more there is given the stimulus or if it’s just a wash (or even less) because of the additional money. I guess it’s an income vs. substitution effect.
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I knew one person who was able to get the homebuyer credit, but had been looking for the past years, had downpayment, everything saved, and everything fell into place. I don’t know anyone who did the cash for clunkers. Ironically a number of people we know have cars that are too “old” to qualify for the “clunkers” rebate but as they still work fine continue to drive them. I do find it strange the assumption that people with new cars will for some reason drive more, cancelling out the gas efficiency benefit. I would think most people drive for utilitarian reasons such as commuting or grocery trips which would not flucuate much.
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@Funny about Money #3:
” it should be the other way around: the older, less efficient, and less safe the junk is, the more you should have to pay to insure it and to clutter the public highways with it. ”
Why should you pay more insurance when it cost less and less to replace the entire vehicle as time goes on? Maybe pay more life/health insurance the older your car is, but not auto insurance.
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Do NOT assume the bank is making sure you can afford your new home! The new regulations do not make them give you a smaller payment, they are just required to disclose more to you so you can understand the risks, and costs involved. However, the market forces are preventing rediculous loans from being approved, and the rates are still pretty low compared to historical rates.
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I would also say that the $8000 isn’t exaclty going straight into your pocket. Some, if not all of that $8,000 is wrapped up in the price of your new home, because it’s creating more demand for home, which increases the price… If you have heard, or seen the prices for houses drop, picture the price w/o the stimulus, wow. What do you think is going to happen when the stimulus expires? Immediate drop in house prices, by about $8,000.
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Also, to reiterate. DO NOT assume the bank is choosing an amount that you can afford comfortably. Do the math, make your estimated payment (including taxes, PMI, Insurance, increased utilities etc) for a few months into your savings account, and then watch your spending habits to make sure you aren’t increasing your debt. If you can handle it, and you feel comfortable, then it’s time to consider one of the other 50 things to consider when buying a home.
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I appreciate that GRS usually likes to steer clear of the major political issues of the day (especially during the 2008 election), but let’s face it: everything is politics. A widely-read blog espousing frugality is making a political point. I’m guessing that this is just a political point that GRS readers don’t disagree with.
In fact, an interesting thought experiment lurks within. What if the government adopted the advocacy of personal frugality as official government policy?
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Adam,
I think you make some great points about home purchasing. However, one thing I see repeated over and over on financial blogs lately is, “buying right now if you weren’t planning on it is a mistake”.
I will disclose right now that I purchased a condo to take advantage of two things, historically low interest rates and a large supply of condos in my area, DC. The tax credit was definitely an incentive for me to move quickly and close. It bugs me to see the generalizations made about home purchasing.
For example, I am in my early twenties and had a chance to purchase my first piece of real estate. The payment for everything (mortgage, taxes, condo fee, etc) is equal or less than market rate for rent of a similar unit in the same area. Why would I not purchase?
I agree with a lot of the other commenters saying a home purchase is a big decision. I just wish the other side of the story was told as well.
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Where can I get info on cash for appliances?
Also, the $8,000 house credit…. How does one claim the $8,000?
Thank you.
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@Tom:
There are good reasons not to make that purchase, even if it would cost more to rent right now.
What if the housing market continues to drop? Rents will drop with it. A year from now, rents could be less than what you’re currently paying for the house, but you’ve committed to paying that rate for the next 30 years. If you want to sell, you could easily take a loss worth tens or hundreds of thousands of dollars — much more than the difference between renting and buying for a year or two in the meantime. If you buy a house now for $120k, and in three years it’s only worth $80k, you’ve lost over $1000/month. Is buying that much cheaper than renting? By buying now, you’re taking the gamble that the value of housing isn’t going to drop from where it is, at least not by more than the difference you’re saving by not renting.
This doesn’t necessarily apply to you, but all I’m saying is there’s more to take into account than a monthly payment. A monthly rent of $1000 with the standard one-year lease only commits you to putting $12,000 into a venture. A home purchase commits you to at least an order of magnitude more than that.
Also, given the way that interest is worked out, you pay almost zero towards the principal of a loan in the first five, or even ten, years that you own it. If you plan on selling in that time frame, you will have accrued almost zero equity in the home (unless it’s risen in value), and so you might as well have been renting in many respects.
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I am 25, have a decent job and earn a good income. However, as awesome as the deals are to be had on a home, I’m not in a position to buy a house. I figure I’d need 10k in cash to facilitate buying a home (furniture, repairs, cushion). On top of that I’m in the Detroit area, which is a mess right now (I’m doubtful there will ever be a recovery, partly because our Governor is a freaking moron,we are heavily dependent on the auto industry, and more and more people are leaving our state every day). At the same time I only pay $250 for rent/utilities currently and am aggresively paying off my student loans (only 5k to go! Down from 23k when I graduated). I also am not interested in buying a house due to the fact that it ties me down. I’ll never be able to sell around here, and it’ll just be an anchor if I want to move out of state or to another city in state.
I do follow the no credit ramsey approach. Come february I’ll be stashing away cash big time (hopefully 15k or more a year for the next 5 years) and will have quite a decent amount stored in my 401k as well.
In Summary, I don’t have the cash, and even if I did I wouldn’t because it’s not wise for me with my current situation (cheap rent, unstable job, lack of cash, etc).
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@Tyler
You make a great point about how the housing market can go down more. I have to disagree on how much though.
Your example about a home valued at $120k now dropping $40k is far too unrealistic given the current economic conditions. If homes took another 25% drop, the US along with the world is in serious, serious trouble.
Buying a home (condo in my case) goes along living it in for at least 3 to 5 years, as well as being able to afford the all the payments. I don’t think I was clear on that before, so my apologies.
Below is more of a discussion point:
When I purchased, this is the situation I was planning on…
I purchased a home in an area with a high demand for rental units. At some point in the coming years, interest rates will need to rise significantly to combat inflation. When this happens, borrowing the money for a home will be near impossible for most people. This in turn will drive rent up significantly because an individual’s purchasing power will be reduced, therefore increasing the demand to rent in popular areas.
I could be completely wrong on this and the US could dive into a deep depression. On the other hand, it could all happen like I see it, and I just made an excellent investment. Just a different way to look at things, that’s all.
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Well written, Baker. I’m not a fan of these programs, but that aside, I agree that incentives should not be a reason to buy something you otherwise would not buy or could not afford, and while some people think that’s obvious, to many it is not.
Also, those commercials telling people that house inventory is low and to buy this year for the tax credit drive me nuts. Just thought I’d add that in there.
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Adam, you sound like Dagny in Atlas Shrugged. (Highly recommended–its warnings are truer today than they were when it was written). She was determined to make her decisions regardless of the shifting government policy, and it worked–for awhile.
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I’m taking advantage of the house credit, but my husband and I decided to buy a house before we even knew the tax-credit existed. It was/is a nice bonus.
I think this is one of those cases where “you don’t solve money problems with money”. Money is probably better spent in education and in making personal finance simpler. But it’s not as simple a program as “Cash for Clunkers” and the name wouldn’t be as catchy. ^_^
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