I am still “away from the office”, but here is a very interesting New York Times article about buying versus renting a house I wanted to share – A Word of Advice During a Housing Slump: Rent. I’ll add more commentary after I fly back tomorrow, because we actually have been looking at some houses and neighborhoods in between family events while we are down here.
In particular, I enjoyed playing with this interactive Buy vs. Rent Calculator, because it shows you how sensitive these calculations are to your assumptions. A 1% difference in expected home price appreciation can make your expected “break-even” time vary by 5 years or more! (I am very skeptical that I or anyone else can predict the home appreciation rate in any specific area within 1% for the next several years.)
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I thought the NYT widget was one of the better Buy vs. Rent calculators I’ve seen. I’m a fan of renting especially when you’re younger. I think too many people commit to house at point to their life when there’s too much uncertainty. It’s great in up market, but I think especially given the turn in the market that you’re exposing yourself to alot of risk if you have to move because of work or school. I always say buy a place if you can afford to sell it in a year, and not be substantially affected financially.
Ok at first that calculator really freaked me out. Had I made a huge mistake in buying a house? Then I started looking up historical appreciation rates and according to the Office of Federal Housing Enterprise Oversight, US housing appreciation has averaged around 5.4% since 1980.
Entering in 5% and I got buying will be better after 5 years, which generally conforms with the personal finance books I have read.
Here was my strategy with the calculator: look at risk, reward, average returns. I’m not sure if the historical appreciation numbers I used are accurate, but it’s a start.
For our rented condo on the West coast, with average price appreciation (2%/year*) renting wins out by about a 1/4 of our net worth. Condo fees were a substantial factor.
Risk with worst historical price appreciation (-4%/year) over 5 years, renting beats buying by 3/4 of our net worth, even if investments earn 0%, unless rents go up by 20%/year. Condos are already down 6% from the peak, here.
With best historical price appreciation (15%/year) over 5 years, buying beats renting after 1 year, even if other investments are on a similar streak. This would more than double our net worth over 5 years.
I estimated that to do the comparison accurately (house as forced saving model), I’d need to invest $20k every 5 years while I’m renting that I wouldn’t invest if I bought. I estimated this number by plugging 0’s into all the appreciation numbers, and seeing the difference with renting.
So my strategy continues to be: to rent until I move someplace with no condo fees, in a cheaper part of the country, for 5 years or more.
* Case Schiller repeat-sales Index, 1.2% real 1975-2003
Buying in a slump seems like the best thing you could do…isn’t the saying always “buy low sell high”. Why wait for things to get better before you buy? And also, I’ve never rented. I bought my house 2 years ago and every payment is equity as far as I’m concerned. Had I rented for 2 years, every payment would have been a waste. Like my dad always says “…just throw your money up in the air and run out from under it”.
I have my own advice: 1. Never rent if you can help it. 2. Never listen to the NY Times or any other media outlet when it comes to investing, unless you’re doing it to find a bottom (that’s usually the point at which every news outlet tells you to get out of something because all hope is lost).
I would really have to say that the rent vs. buy debate has to factor in the cost of any renovations during the time of your ownership. I would think I was so wonderfully lucky and clever to have bought my house for $160K, now worth about $400K, except that I spent well in excess of $70K, plus my husband has been working on the dumb thing for almost 7 years. That’s a life cost and NOT WORTH IT! So lets see, we spent about $230K outright (this doesn’t include our outrageous taxes – IMO-) and okay, we have a profit of $170K. But that’s after spending the last 7 years arguing and running to Home Depot. The more I think about it — the more I just wish I would have put all of money – the down payment, the money for renovations, and everything else into a nice mutual fund and just rented a decent apartment. For me, this would have been far better – YMMV.
All I know is that I will not renovate a house again. Carpet and paint — that’s it. Those are the smart people.
Robert,
Who cares about the article, the important part was the calculation page. Whether the calculation page came from the NY Times, the Wall Street Journal, or from your own Excel program you should get similar results if you consider all the same variables (although I doubt you could make one as comprehensive yourself in Excel).
The NY Times is not telling you to buy or rent, it is telling you to run the numbers yourself instead of blindingly thinking buying is always the best decision. I ran the numbers on my house that I bought in 2003 in Texas, and it comes out that buying it was, in fact, the right decision (which is a good thing since I also used a similar calculation in 2003 when I bought it – in fact, the NY Times calculator matches what I had calculated almost exactly). But if you ran the numbers on another house, you might find you are “throwing your money away” by buying it. You would NEVER rent a house in any circumstance? Are you kidding me?
BTW, the calculator allows you to even change things like maintenance costs, tax consequences, investment rates, etc… it is quite comprehensive.
Don’t you just look at your current life situation (are you stable and staying in the area or moving all the time?) and then compare the costs of renting vs. owning and make your decision?
I was renting a house in the Midwest for $800/month. I bought a house on a 30 yr. fixed mortgage and pay around $1000/month. Since the extra amount per month wasn’t a strain on my budget, I figure buying is better than renting. And my utilities went down because the house I bought had more efficient windows/doors, programmable thermostat, etc. PLUS, I get all the “intangibles” of buying vs. renting such as making changes as I see fit to where I live.
When you’re pretty much paying the same amount to buy vs. rent, doesn’t it make sense to lean towards buying (provided you don’t plan on moving next year)?
I read the article as well, and didn’t like it.
I think buying is definitely not for everyone, but it’s definitely for me! I think using the “slump” in the last two years proof that homebuyers made a bad decision is silly. We bought a house the year after graduated college (2003) and have been loving it ever since.
Robert
There’s obviously a price where renting becomes favorable. Taking the limit if you were offered a rent for $1 for as long of you wanted of your dream home, wouldn’t you love to “throw money away”? Take away the emotional aspect of the dream home for a minute and imagine how much you could invest the leftover money for. Or if you truly believe in home appreciation you could by a home and have a renter pay for most of the mortgage. Either way, there’s a point where renting is valuable and not “throwing money away.”
We bought on west coast. We are now paying almost same amount as rent on top of our mortgage. This includes property tax ( non deductable, thanx AMT), HOA dues, maintenance, utilities bill (our rent included water + heating + garbage+cable). Plus the house is worth less today than when we bought it. Only advantage is reduction in spousal nagging.
Does anyone know whether the calculator re-appraises property tax value annually? Because of prop 13 in california, property tax never changes, so the calculator would be *slightly* bias against buying for californians….
Thanks for the great comments!
Brian,
I guess I’d rent if it were a situation where I could deduct the rent as a business expense. And I guess it would depend on the situation. For me, my mortgage payment (with taxes and escrow included) is less what a lot of people pay to rent where I live and not three times higher (and this is for a 30-year fixed). Reading that article though just turned me off from even wanting to play with the calculator because of how the writer talked about possibly not buying in a slump…like he’d rather you wait until prices are going up and up and up to buy….at which point an article will come out telling you that it would have been a good idea to buy during the slump.
This is a pretty good calculator. The one thing I wish was included here though, is an option for buying a duplex/townhouse. If you don’t mind sharing a yard this can be a good deal since a renter is helping you pay your mortgage. Plus, any paper loss that is generated from depreciation each year is tax-deductible. This type of investment can help offset the cost of buying considerably, given that you also don’t mind becoming a landlord. I would be interested in playing with the numbers when being able to add in the additional rent and tax advantages for this type of property.