I don’t know Kelley Keehn, but I guess she’s on the move. TV show on W. Writes financial books for ladies and kids. Auditioned for HGTV. Gives talks. You know the drill. An achiever with a sultry self-image.
A few blog dogs mentioned a column in the Globe yesterday in which a husband and wife from troubled Calgary moaned at each other over owning real estate. They’d sold a townhouse for $150,000 to move closer to a school for their problem kid. She wanted to keep renting and not spend their nestegg on a house. He wanted to be Cowboy Big and buy s $400,000 place cuz real estate’s going to the moon.
To show how sophisticated they are, they asked for financial advice from a newspaper. And that’s where Kelley came in, as the ‘financial expert.’ Did I mention she’s smokin’? In a fiscal way?
This couple is aged 50. Mom’s an unemployed exec. Hubs is a 70K-a-year apprenticing plumber. Total assets amount to $200,000 in GICs and $40,000 in an RRSP. He has no pension. She has a tiny one payable in a decade. And they have two kids about to start university, but no RESP.
And what’s the advice? “You should get back into the market,” says expert Kelley. But buy a cheap house, like for $300,000. Use a hundred grand of your savings as a down.
Now, this might be the right thing to say to save a marriage and land a fat gig on House Hunters, but let’s think for a minute. These people have scant net worth for a couple their age. They’ve saved nothing to help their kids through school – and university now can cost $100,000 for four years. They’ve virtually no pension income to look forward to. She’s been out of work for five years. They make 40% less than the average Calgary family. And they should buy a house?
Let’s figure it out.
The lady biz whiz’s logic is this couple can own a home for about what they pay in rent now ($1,600 monthly), so they should (no actual financial reason is given). We’ll talk about the merits of buying a house in Cowtown (or anywhere) in a minute.
Hubs says he’s tired of “throwing money away” on rent. Apparently he’d rather throw it away on other stuff. In fact, buying a house – even for $300,000 – could end up costing these guys a bundle simply in cash flow, let alone the potential of a capital loss.
For example, buying at three hundred with $100,000 down will mean about $6,000 in closing costs and a $206,000 mortgage. At 4.35% for three years (going VRM with rates about to rise is a gamble) and a 25-year am, the monthly is $1,123. Add in insurance, property tax and an annual pittance for repairs, and that rises to $1,523 – virtually identical to the $1,600 in rent.
So, the HGTV expert would tell you, of course it makes sense to own! And build equity instead of paying someone’s mortgage!
At $1,523 a month, this couple will pay $54,828 in occupancy costs over three years. Of that, $14,400 goes for insurance, maintenance and property taxes they would not have faced as renters. And another $25,741 is interest to the bank. That totals $40,141 in cash flow sucked off for no capital benefit. So over three years, they spend $54,828 and add only $14,687 to their net worth in the form of equity (assuming the house maintains its value, and excluding selling costs, which would reduce this to zero).
Had they stayed renters, the $100,000 downpayment, if invested in a balanced portfolio of 40% fixed income and 60% growth (no individual stocks, no equity mutual funds) yielding 8% would throw off $25,971 in growth. Meanwhile they’d have the same occupancy costs for shelter, but end up with $11,000 more in net worth.
Therefore, renting beats owning – at least if the goal is building financial wealth. And as renters, this couple would have liquid assets of $265,000 after three years, while as owners that liquidity would be just $140,000. In this crazy world, nothing trumps being liquid. Finally, as I mentioned above, if they sold the house after three years and paid 5% to do so, assuming no loss in value, the whole exercise would result in a net loss.
So tell us again, expert Kelley, why is this a genius move? Especially for a couple that puts house horniness before educating their kids, or their own retirement? Grasshopper? Ant?
Of course, the house could go up in value. But I don’t know why. Or it could go down. Which is a helluva lot more likely.
By the way, did you catch the latest news from USA land? New home sales just plunged 17% – the worst number in 50 years. The median price of a new home fell another 14%, which means it’s the same price as in December, 2003.
Japan. Libya. Rates. Debt. Inflation. Delusion. It’s a world of risk.
Unless you’re ambitious hot.