Buy vs. Rent
Based on some of the comments and the e-mails I have received, the ‘buy vs. rent’ decision is becoming a big one for many people. It is also becoming a ‘heated’ subject for some people.
I want to take some time this week to really address the pro’s, con’s and other factors that should be looked at when making this decision.
I will be back at my computer later today, and will start getting into this subject at full length. Until then, I suggest spending some time in the Forums. It has been a little over 72 hours, and already there has been quite a lot of activity. I especially want people to read THIS THREAD.
Check back later in the day, as I look forward to tackling this buy vs. rent decision in a financial, not emotional way!
SoCalMtgGuy
February 6th, 2006 06:29
I suggest checking out this interactive web article, which shows that in much of the country housing is more affordable than it was in 1985 and 2000 (not great years for affordability, by the way): http://www.nytimes.com/ref/realestate/20051229_AFFORD_GRAPHIC.html.
Generally, I’d say that if the average household would have to spend more than 25% of its income to buy, it’s too much and one needs to wait. If you are in the Buffalo area, however, why not?
February 6th, 2006 06:45
My buy vs rent spreadsheet:
http://www.icsi.berkeley.edu/~nweaver/buy_v_rent.xls
THe current numbers are the actual numbers for a condo-conversion of my apartment complex.
Play with the numbers yourself for your own situation if you want.
February 6th, 2006 07:39
Nicholas;
What is the discontinuinty at year 9 of your graph? Are your calculations based on an 80-10-10 with a 10 yr. second mortgage?
February 6th, 2006 08:23
SoCalMtgGuy - hey, thanks for your interest in my problem. I hope more people contribute their own stories to the thread, so I know I’m not the only one struggling with making the housing/rent payment in a bubble area. In your buy vs. rent post, can you also let us know what percentage of income people should spend on their housing plus other debt? The percentage that was famously followed until credit standards got looser.
February 6th, 2006 08:35
No, currently its 90% with 10% down and PMI. You can remove the PMI effect by setting the PMI rate to 0% to eliminate the discontinuity.
I didn’t want to model thet 80/10 style because I can’t predict interest rates well enough.
February 6th, 2006 08:47
I agree with Larry, that in much of the country, even in areas that have seen big price increases, buying might be a good idea. I did just that last summer, at what was probably the exact peak for prices.
What made it a good idea?
1) The chances of my family moving are pretty much nil.
2) I can afford it: PITI about 12% of gross household income, my current income level is virtually guaranteed to improve slowly but steadily, 30 year fixed with 20% down
3) Property is in an extremely desirable neighborhood. Moving here also meant we could get rid of one car because we can both walk to work, and we now put about 300 miles per month on the one we kept.
I wouldn’t be at all surprised to see prices drop considerably here over the next few years, including for my house. But I don’t care what happens over the next few years, because I’m not moving. In 25 years, maybe I’ll move, and I feel pretty comfortable with the value of the property over that time frame.
However, I wouldn’t necessarily go with the 25% number. Historically, the ratio for San Diego and other SoCal locations has been higher than that, and you know, these are nice places, and there is nothing wrong with paying more to live there. If I could transport my life here to San Diego and pay twice what I currently do for housing, I’d strongly consider it. But quadruple? No way.
February 6th, 2006 10:51
I cannot comprehend anyone buying a house, knowing it will drop ‘considerably’ (i.e. way more than 50%), and being OK with it. Even the richest man on the planet (Buffet) sold his Orange County house.
Who knows what will happen in 25 years? There could be another world war, or California could raise taxes considerably. Why trap yourself into a house when renting is obviously much cheaper???
Could you share what occupation is virtually guaranteed to rise? The only thing guaranteed to go up IMHO is gold, oil, and uranium.
February 6th, 2006 11:54
Here’s what one article from OCRegister has to say about the affortability issue in OC.
“Homeownership still is attainable, they say, but only if newcomers are willing to accept what some consider unpalatable compromises: added risk, longer commutes, borderline neighborhoods and higher house payments.”
so the price of homeowership now is this:
–live in the slum or the barrios, for those of you with children, this also means subpar schools and questionable friends.
–live far away, so you spend 2-4hours in traffic, less time for your family, more stress, less supervision for your children, less time to exercise and eat well, more fast food.
–higher house payments, thus less savings, and more financial stress, which means more strain on a marriage already worsened by having to live in a subpar neighborhood or having to endure long commutes
So really, the price is homeownership in OC is a broken marriage, questionable future for your children, and an earlier death.
February 6th, 2006 12:06
Anonymous:
Actually, in RATIONAL markets, you pay less to buy than to rent, if you exclude the payments to principle. (It takes more cash flow to buy, but the payments to principle you see again. If it didn’t, a landlord would lose money.)
I ran the numbers for non-bubbled areas (eg, Cleveland Ohio where a friend lives). Rent ~= (Interest+tax+HOA+insurance-deductions). Same for a few years ago in Virgina when my friend bought his townhouse.
The only way “buying is cheaper than rent” in these bubble markets is to stay at the same place for 10+ years. And If you believe the market will just stay flat, postpone buying until rent inflates to a higher level anyway.
Lest you think I’m just BSing you, I’ve put my money where my mouth is. I could afford a 10+% down-payment on a house. I have the income to cover a good sized mortgage. I have very low debt service ($500 a month on a loan I could pay off today, but its a 0% loan so I’d be stupid to pay it off early). I have effectively standing preapproval on a ~$400k+ 30 year fixed mortgage. I even have a few auto-searches at Zip Realty.
But until SF Bay Area prices drop by 15-30% (remember, a 15% drop wipes out a 30% gain), i’m renting and saving the extra. When the distressed property forced-sales happen, or 5 years of inflation + a flat market dissipates the froth, I’ll be waiting.
Also, I don’t advocate trying to market time. I advocate AVOIDING bad timing. If I buy when prices drop to buy ~= rent cost level, and prices drop further after that, I won’t really care. But buying when the cost is >>> rent is just foolishness in my book.
February 6th, 2006 12:09
“I have heard some people say not to try and time the market. I strongly disagee with that. Timely is critical to financial gain.”
More accurately, it should be, “timing is critical to avoiding financial ruin” in the current climate. For the vast majority of people, they shouldn’t even be thinking about financial GAIN, they should be thinking about finding the most financially viable way to live the lives they want and have a home. Where I live and for me personally, that means buying a house, even though I expect to see prices dropping in the next few years. People like me are going to be rare in Southern California, but they exist — if Warren Buffett wants a home in Orange County, he should keep his home in Orange County and no one should criticize him for it, because he can afford it.
Homes are utilitarian things, not stocks, and over the long haul, in many cases, owning tends to be a better strategy than renting. Even with the bubble where it is, this remains true for a large number of people. Unfortunately, very few of these people are in Southern California right now.
February 6th, 2006 12:58
Good, I’m not the only person who remembers the days of “own a home for less than it costs to rent”! That used to be commonplace.
“Pride of ownership” is like “goodwill” on a company’s balance sheet after an acquisition: it’s a way to cover having overpaid.
We rent. Owning a comparable condo would double our housing costs. Owning a house would do the same *and* strand us in far suburbia — not even in a nice neighborhood THERE. We’re in no hurry to buy, as the husband’s career path is likely to require him to be able to relocate, and in a normal housing market, you don’t make money after realtors’ fees if you own a house for only a few years.
The mortgage interest deduction is a great thing if you want to own a home for other reasons. On its own, it’s throwing away $1 to get back 30 cents.
The major reason for us to buy eventually is to lock in LOW payments for the future, plus to have a house paid off before retirement.
February 6th, 2006 13:50
Nicholas,
I agree with your post, however, there is one minor correction. A 15% decline does not wipe out a 30% gain. This type of error is generally derived from the oft-quoted fact that a 50% decline erases a 100% gain. This is true.
If I start with $100, it goes up 100% to $200, then goes down 50% it is back at $100.
If I start with $100, it goes up 30% to $130, a 15% decline would bring it down to $110.50. In order to wipe out your 30% gain, you would have to lose 23%.
Losses ALWAYS hurt more than gains feel good, just not always double.
By the way, the larger the percent numbers the more times fold the loss is versus the gain.
February 6th, 2006 14:34
Yeah. Stupid me.
I keep screwing that gain/loss up.
IN any case, I could see a REAL loss of 30% easily happening (through some combination of drop and flat for N years so inflation eats things away)
February 6th, 2006 15:13
“IN any case, I could see a REAL loss of 30% easily happening (through some combination of drop and flat for N years so inflation eats things away)”
EASILY. If prices remained stagnant for while inflation chugged along at a relatively modest 3% for 12 years, real prices would have declined by 30%. However, if nominal prices declined by 10%, real losses of 30% would occur after only 8 years. And if nominal prices decline 20% (very likely in many areas), it only takes 4 years of low 3% inflation for real losses of 30% to mount.
And the most obvious, a nominal drop of 30% in prices immediately equals a 30% real decline, unless we are in a general state of deflation.
February 6th, 2006 19:16
ET,
Exactly right! But interesting to note that on a practical level a 15% loss does wipe out 30% real estate gain:
The $100 goes to $130, then down to $110.5. Now to sell it, roughly 10% cost to sell brings it to about $100.
February 6th, 2006 19:38
Nicholas Weaver
In your xls have you considered that tax savings on mortgage interest and property tax requires itemization of deduction and so diff between renting and owning should only account for the tax break on the additional amount over standard deduction. Renter will anyway get the break on standard deduction.
February 6th, 2006 20:50
I remember reading that John Wayne gave a young Ron Howard advice once- he told him to buy his house cash with his first windfall - so he always had a place to live. It still sounds like good advice.
As long as Congress keeps the ATM tax as is, more and more people will not benefit from interest deductions on homes — it’s almost as if they want to eliminate all deductions and put us all at a 28% tax rate. With inflation this will happen in 10-15 years. (Therefore, no political capital has been expended to eliminate all housing and state income tax deductions - blue states will be hurt the most, higher taxes and higher cost of housing– to bad)
Buy your house when you can pay it off before you retire. Forget the tax savings.
February 6th, 2006 21:21
Jay: Anyone who can afford a house is shelling out enough tax that itimizing is worth it before the mortgage and property tax deductions.
February 17th, 2007 20:07
-uk.php…
-uk.php…
January 19th, 2008 22:20
view your canada credit report online…
plentifully motorcars mull vacuous sleet …
February 9th, 2008 02:13
fast cash loans guaranteed…
revives meal tales severed landmarks Australis!…
February 20th, 2008 04:18
bingo for cash pay…
evened Aviv borrows …