Buying a house for a shorter term

Question

I've lived under the impression that it is never wise to buy a house (as your home) unless you are planning to live there "at least five years" (or something like that). But is this necessarily always true?

I currently live in an area in which the local rental market for houses (that is, renting a house to live in) does not have many offerings at all at any given time, and yet it has a large number of houses for sale, many of which are low-priced relative to the range across the U.S. Yet my work future has some uncertainties and I can't know how long I will live in this area.

So, the question: In terms of the personal finances aspects, are there ways in which it would be sensible to buy a house as one's home just for, say, one year (or so), or is that essentially always a losing proposition relative to renting?

Answer 1

To answer your question, you need to ask yourself

• How much are the transaction costs to buy and, later, sell a house?
• Can I recover, in a single year, these transaction costs and still make a worth profit?

Common transaction costs can be really hard to compensate in a single year. It can include house inspections, closing costs, agents commissions, etc---all together, it can be up to 6-10% of the value of your house. This is a difficult goal to beat in a year, and your margin for miscalculations and market fluctuations is very low. In brief, you can be screwed big time.

To make a profit in a year, you need to reduce transaction costs to the minimum: Avoid agents, inspectors, mortgage brokers, etc, which can pay you back with an interesting surprise. Bottom line, it can make sense to buy a house for a year, only if you can reduce all the related transaction costs by doing them yourself.

If there are many houses in the market for sale, I would try to convince someone to lease the house for a year in the best terms possible (and maybe even try to sub-lease some of the rooms), or also rent-to-own the house. That way you avoid the transaction costs upfront, and would make more financial sense for a non real estate guru.

Answer 2

If there are a lot of houses for sale, can you be sure that in a year or two you can sell yours? How long does the average house in that area stay on the market before it is sold? What percentage of houses never get sold?

If it can't be sold due to the crowded market you will be forced to rent the house. The question for you then is how much rental income can you get? Compare the rental income to your monthly cost of owning, and managing the house.

One benefit to buying a house in a market that is easy to rent a house would be if you are forced to move quickly, then you aren't stuck being 3 months into a 12 month lease.

Keep in mind that markets can change rather dramatically in just a few years. Housing costs were flat for much of the 90's, then rocketed up in the first half of the last decade, and after a big drop, they are one a slow climb back up. But the actual path they are on depends on the part of the US you are in.

The rule of thumb in the past was based on the fact that over a few years the price would rise enough overcome the closing costs on the two transactions. Unfortunately the slow growth in the 90's meant that many had to bring checks to closing because the equity gained wasn't enough to overcome the closing costs due to low down payment loans.

The fast growth period meant that people got into exotic loans to maximize the potential income when prices were going up 10-20% a year. When prices dropped some found that they bought houses they couldn't afford, but couldn't sell to break even on the transaction. They were stuck and had to default on the mortgage.

In fact I have never seen a time frame when the rule of thumb ever applied.

Answer 3

There are two main factors at play to consider.

1. Real estate markets can be volatile in the short term so there is greater risk when buying a house you know you need to get out of quickly.
2. If you finance the house, the closing costs are a bit higher proportional to the total time you are financing the house. It may tip the scale towards rental if you are comparing true cost over the 5 years of living in the house.

Also, realize that no advice is universal. You need to evaluate your exact situation and do what is best for you.

Answer 4

When on this topic, you'll often hear general rules of thumb. And, similar to the 'only buy stocks if you plan to hold more than X years' there are going to be periods where if you buy at a bottom right before the market turns up, you might be ahead just months after you buy. I'd say that if you buy right, below market, you're ahead the day you close.

Edit - I maintain, and have Schiller providing supporting data) that real estate goes up with inflation in the long term, no more, no less. If the rise were perfectly smooth, correlated 100% month to month, you'd find it would take X years to break even to the costs of buying, commission and closing costs. If we call that cost about 8%, and inflation averages 3, it points to a 3 year holding period to break even. But, since real estate rises and falls in the short term, there are periods longer than 4 years where real estate lags, and very short periods where it rises faster than the costs involved.

The buy vs rent is a layer right on top of this. If you happen upon a time when the rental market is tight, you may buy, see the house decline 10% in value, and when the math is done, actually be ahead of the guy that rented.