Savannah, GA
By A.B. Dada

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I just visited gorgeous tourist-heavy Savannah, Georgia to take a peak at the housing market. I landed Friday and am flying out of Atlanta on Tuesday. Over the weekend, I visited condos, houses and townhouses for sale. I made stops in Savannah Midtown and Downtown, Hilton Head (SC), and Tybee Island. What I found seemed reasonable, but it gives me excellent ammunition to show what types of problems are ahead of new home buyers.

I found a great condo in Savannah Midtown. 1600 square feet, 1/2 mile from groceries and restaurants, gated and secure community, and a nice layout. Total price — $249,900. For the location, quality and overall condition, the price seems reasonable when condos in my area of Chicago sell for triple. I figure this is an excellent example of why buying in a declining market is a bad idea. It is even worse if your market has houses priced even higher. I found two units for rent in the same development, both for $1500/month. Both were still vacant, meaning the rental price might have been too high.

Let’s look at the cost to rent versus own:

Rent — $1500/month

Own:
Mortgage, 20% down, $200,000 @ 7% fixed — $1330/month
Home Owner’s Associated — $340/month
Property Taxes — $150/month
Insurance — $100/month
Total Cost to Own: $1920/month

That’s assuming a 20% downpayment. With a typical 5% down payment, the total cost to own runs up to $2170, or almost 45% higher than the cost to rent.

Looking at renting versus owning prices really sets the market price for a home. If you’re paying 45% more than renting, you likely are never getting ahead and building real equity. If you picked the same home and rented for 2 years, your savings in the bank versus equity in a home would be significantly higher. Even worse, if you own there is a risk in a declining market that things will decline further. This is a big risk right now, with some areas seeing foreclosures rising 800% over last year, with more ahead when the adjustable mortgage loans reset. Always get a fixed rate loan.

The second thing to look at is income to housing price. Up until recent times, the most mortgage you could get was about 3X gross income. This means that a household would need $84,000 gross income a year to cover a simple $250,000 loan, and that is assuming 20% down. The last census showed that Savannah’s average median household income was $36,000. If you need to sell your home, who is going to buy it? $250,000 is 7X income — a crazy risk to take for the average income earner. In recent years with the massive credit creation by the criminal-like Federal Reserve, people were given mortgages on houses up to 8X their income. It is no surprise that people are losing their homes en masse.

Beyond having 20% to put down (that’s $50,000 in the bank for a $250,000 loan) and not buying beyond 3X your income, you also want to have some savings to cover the risk of job loss, illness, divorce, or family needs. I’ve always recommended having 2 years in savings to cover ALL your debts and expected expenses. For most people, this is impossible.

At this point, I see no reason to buy. You could rent a $2300/month property for under $1500/month, pocking $800/month (at least) in savings at no risk. That’s $10,000 per year you’d save while ownership prices either fall, or rental prices rise. With the future of even heavier foreclosures ahead, rental prices will likely decrease as more investment homedebtor on the edge of foreclosure try to find some way to cover their costs.

Remember, a homeowner has something to show their ownership: a title free and clear. A homedebtor has a piece of paper that is called a bill that they have to pay for 30 years. Being a homedebtor is NOT a bad thing — if you can afford the home you’re living in. It is better to be a renter than a debtor, if the renting allows you to get ahead and put yourself in a smart financial position even if the rest of the mad, mad world doesn’t understand personal responsibility.