We can't afford to be generous
2.09.2009
We've all heard a lot in the past few years about the prices of homes and how they've inflated exponentially and now how people are foreclosing left and right because they can't afford their mortgages anymore. I'd like to offer up a reason for this.
Let's say you buy a starter house that costs $249k. Chances are, the value of that home is somewhere around $235k. However, realtor fees are typically 6% (3% for each realtor) and that accounts for $15k. On top of that, you have to pay a transfer tax and lots of other miscellaneous closing costs. The transfer tax in some areas is 1%. In the city of Philadelphia, it is 2%. While different fees are paid by the buyer and seller, you're still talking about a minimum of 7-8% of inflated costs. So, a home that's valued for $235k could easily cost about $255k.
Now, let's assume you are trying to climb the property ladder. You might live in your home for 3-5 years. If you have a 30 year mortgage, you may only have paid off $5k-$10k in that time and you'll probably want to recover most of that money to use for a down payment on your next home. So, maybe you'll use the original asking price of $249k as a starting point. Then, you'd probably factor in the realtor fees at a minimum. Suddenly, your home could be selling for about $264k.
In another 3-5 years, the next owner could flip the place for about $280k. So, within a range of 6-10 years, this starter home could've jumped $45k in price -- and this is just accounting for realtor fees. If you wanted to recover the aforementioned transfer tax, any other transfer costs, the price of any upgrades you made, etc., the price could grow even higher.
Draw your own conclusions. However, it's at this point that I'd like to mention that, while we will be lucky to break even on the sale of our home, the realtor's I know drive the following autos: Mercedes, BMW, Acura, Lexus SUV, Jaguar...
Let's say you buy a starter house that costs $249k. Chances are, the value of that home is somewhere around $235k. However, realtor fees are typically 6% (3% for each realtor) and that accounts for $15k. On top of that, you have to pay a transfer tax and lots of other miscellaneous closing costs. The transfer tax in some areas is 1%. In the city of Philadelphia, it is 2%. While different fees are paid by the buyer and seller, you're still talking about a minimum of 7-8% of inflated costs. So, a home that's valued for $235k could easily cost about $255k.
Now, let's assume you are trying to climb the property ladder. You might live in your home for 3-5 years. If you have a 30 year mortgage, you may only have paid off $5k-$10k in that time and you'll probably want to recover most of that money to use for a down payment on your next home. So, maybe you'll use the original asking price of $249k as a starting point. Then, you'd probably factor in the realtor fees at a minimum. Suddenly, your home could be selling for about $264k.
In another 3-5 years, the next owner could flip the place for about $280k. So, within a range of 6-10 years, this starter home could've jumped $45k in price -- and this is just accounting for realtor fees. If you wanted to recover the aforementioned transfer tax, any other transfer costs, the price of any upgrades you made, etc., the price could grow even higher.
Draw your own conclusions. However, it's at this point that I'd like to mention that, while we will be lucky to break even on the sale of our home, the realtor's I know drive the following autos: Mercedes, BMW, Acura, Lexus SUV, Jaguar...
posted by md @ 9:06 PM
2 Comments:
Facilitating the sale of real estate is possibly the best example of an economic sector that only marginally adds value as a result of its productivity. It's not work that individuals couldn't do themselves, but the industry is self-sustaining with a lobby that ensures only realtors have access to things like the full TrendMLS, access to homes under lockbox, and authority to compose the forms needed to complete the transfer.
At least with other non-producing sectors (such as law), there are opportunities for progressive & populist use of the industry, preservation of legal rights, and lasting effects from the results of litigation or legislation.
Further, the mortgage industry is a cash juggernaut that strips dollars from those who need to build it most. The mortgages cost, over the lifetime of a mortgage, one to two times the value of the loaned amount.
The ONLY conditions that make such a transaction a good deal for the homeowner are steady economic growth coupled with a slow but steady inflation of the currency; over a sufficient period of retaining the house. The real estate & mortgage industries do better when people don't keep their houses long.
The combination is a sham for the middle class, used to prop up the banking industry with the real estate industry being a symbiotic bit-player.
Well said.
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