When I was young and stupid I used to subscribe to Money Magazine. It dawned on me one day that pretty much all the advice in that magazine was wrong. It was the print version of CNBC with non-stop cheer leading for stocks, housing, etc.
Case in point:
Young married couple with $500,000 in student loan debt. Medical school debt, so they'll be OK. But this is the part that is amazing.
By the spring of 2006, as med school was drawing to a close, Meg and Chris had a total of more than $450,000 in debt. Soon they added $200,000 more: Matched with residency programs in the Chicago area, they bought a condo unit convenient to their hospitals. They didn't seriously consider renting, since they knew their residencies would keep them in one place for at least four years.At the peak of the bubble they didn't consider renting because they would be there for 4 years? This is the kind of insanity magazines like Money preach. It is the mentality that real estate ALWAYS goes up. And in 4 years you will ALWAYS make money. That is obviously not the case is it Les Docteurs?
Let's analyze their "American Dream" purchase.
- 1% of closing costs = $2000 gone off the top
- Given that they seem like financial boneheads, they probably paid a point on their mortgage, another $2000 gone off the top
- They got an INTEREST ONLY LOAN so at 6% that is a payment of $1200
- 1% taxes is $2000 a year
- HOA for a $200K condo would be a minimum of $150 a month
If they can sell the condo for $200K in 2010 (highly doubtful but let's play make believe) they will pay 7% in closing costs, realtor fees, transfer taxes, etc. So on top of the $76,800 they will spend another $14,000 bringing the total to $1891 a month. For that money they could have rented a bigger,nicer apartment than their condo.
Here is the chart for Chicago condos over the past year....not looking too good there Doctors. Let's now assume the price of their condo is worth 2% less when they try to sell. That is another $4000 spent or another $83 a month. At a 5% loss their total monthly cost of "owning" is $2100. For $2100 in rent they could live in the pimpest of pimp apartments and not have to stare at a 7-11 from their "owned" apartment.
Money Magazine will never break it down like that. All they do is preach the NOW IS A GOOD TIME TO BUY and renting is throwing your money away bullshit. Well these young doctors will quickly find out that it was not a good time to buy. It was actually about the worst time possible to buy. It was like buying tech stocks in late 1999. And renting in a down market is not throwing money away, it is saving money from being withered away.