True cost of owning

A lot of the spin on real estate is that things aren't THAT bad. Prices are ONLY down 5% or maybe 10% in the worst hit markets. No biggie the spinners say. Well assuming 5% or 10% is right - which it isn't, not at all, - it is still a huge loss for most people.

Let's say you buy a $500,000 house and put 10% down. You pay 1% in closing costs when you buy. When you sell you pay 1% closing costs. And 1% is conservative it can easily be 2 or even 3%. Also when you sell you pay 6% real estate commission.

Now let's suppose the value of your house drops a scant 5%. You sell for $450,000. Your entire equity has just vanished. But in reality your selling price is only 93% of $450,000 since you pay 1%closing costs and 6% commission. So you are down to $418,500. That is a net loss of $86,500 or 173% of your initial investment.

At 20% down you are losing 86% of your initial investment.

At 5% down you are losing 344% of your initial investment.

Ahh yes but the tax breaks make up for all that will say the spinners. Not really. In general any tax savings received are offset by property taxes and HOAs. Keeping with the above example, a $450,000 mortgage at 6%, someone in the 25% bracket would save $6750 in taxes. For a $500,000 house, $5000 to $6000 a year would be a standard property tax bill. $100 a month HOA fees eat up another $1200. Add in some repairs and the maintenance required to keep up a $500,000 home and there goes your tax break.

Only time it makes sense to own is in a fast appreciating market like 2002-2005. Then owning is fantastic. However any time a market is flat or even declining just 5-10%, owning is a bad idea.