I am hoping someone here will be able to clear this one up for me.
One of the frequently-repeated arguments that real estate salesmen use to try to convince the renter-serfs to buy a home is that once you buy a home, your costs are fixed. While that's not entirely true (taxes, insurance, and maintenance can all increase—and it's not true at all unless you get a fixed-rate mortgage), the costs can certainly be more stable than renting, where your monthly rent is likely to increase with inflation.
However, the very same people that tout the "fixed-cost" of home ownership will turn around and offer another argument for buying: get on the equity escalator so after your home appreciates you can trade up to nicer digs. This is where I get confused. If your goal is to "trade up" for a nicer home in 5-10 years, aren't you negating the entire "fixed costs" argument?
Let me throw a few numbers out here to try to explain what I'm talking about. Let's say Milton S. and his wife are paying $1,200 per month to rent a little two-bedroom house. They decides to stop "throwing away their money" on rent, and rush out to purchase a home (before they get priced out forever), finding a two-bedroom 1,200 sqft house in Shoreline for $325,000. Assuming they get a 30-year fixed at 5.75% and have the $65,000 to make a 20% down payment (a fairly generous assumption), their monthly PITI payment is now just shy of $1,900. They do save over $2,000 that year on their taxes, so let's shave off a slightly generous $200 per month, and round the monthly payment down to $1,700.
Right off the bat our example couple has willingly signed up for a 42% hike in their monthly expenses (not counting maintenance). That's quite a premium to pay just so you can have "fixed costs." With hikes of 3% per year, it would have taken 12 years for their rent to reach that level. But hey, at least their costs are fixed, right?
Well, what happens when 10 years down the road they want to "trade up"? Thanks to the "equity escalator" and annual 4% appreciation, their $325,000 house nets them a sweet payday of $227,500 (after fees & taxes). Unfortunately, the house they would like to trade up to—a four-bedroom, 1,900 sqft house in Ballard that cost $450,000 when they bought their first home—has been appreciating at 4% per year too, and now costs $666,110. Even after putting the entire amount down from the sale of their first home, their monthly PITI payment (minus tax savings) will jump 65% to $2,800. The situation is even more skewed if you assume greater appreciation (like say, 7%), with their $1,700 payment skyrocketing to $3,294.
After 10 years and just one trade up, jumping on the equity escalator has resulted in a 133% increase in monthly costs for our fictional couple (over the original $1,200 rent). If they had instead continued renting, their monthly rent after ten years would have increased "just" 34% to $1,613.
So I guess what I'm saying is that I can't see how the "fixed costs" and the "trading up" arguments can both be true. The real issue here seems to be that the idea of trading up when an over-inflated market is your starting point just doesn't make any sense. If Milton and spouse had bought that $450,000 home to begin with, still only putting down $65,000, the monthly PITI would have only been $2,521 (assuming PMI— it would drop to $2,350 in three years when the equity reached 20%).
Can anyone describe to me a situation in which "trading up" is a winning proposition?
