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Thursday, April 12, 2007

Better to Rent or Buy?

posted by on April 12 at 11:41 AM

This story is now a day old, but I don’t think it got enough local attention (or any, as far as I can tell).

Yesterday, The New York Times announced that it had crunched the numbers and found that over the last two years, renting was a better bet than buying.

In a stark reversal, it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.

Granted, this finding represents a nation-wide view, and the Seattle real estate market, as everyone is always pointing out, is a bit anomalous. I don’t have time today to parse all the nuances of this story or figure out how well it applies to Seattle (if at all), but I bet our commenters do.

At the very least, I bet a lot of people will enjoy this fascinating online calculator, set up The Times to help you figure out if it’s better to rent or buy at your price range in your particular locale.

RSS icon Comments

1

Turns out only 2 years for buying to be a better choice for me.

The main advice is if you move frequently, rent don't buy. If you move less than once every 4-8 years, buying is sometimes a good choice.

And a personal note: always live in a neighborhood that is cheaper than you can afford - you won't feel as pressured to keep up with the Joneses.

Posted by Will in Seattle | April 12, 2007 12:10 PM
2

These calculations usually assume that the money you save from not paying for maintenance on a house is put into a fairly high interest bearing account (and not spent on the other kind of CDs and Indian food).

Posted by Stephanie | April 12, 2007 12:19 PM
3

If you consider how quickly houses appreciate in this market, it's better to buy- at least until the bottom drops out. I tried the calculator, and it said that buying would be better after THIRTY YEARS. I adjusted the appreciation rate to reflect last year's increase (8-10%), and the calculator suggested that buying was better after one year.

I've decided to stop trying to get in on the housing market, and focus instead on renters' rights. It's like deciding to stop bitching about not being able to afford a Ferrari and agitating for better bus service instead.

Posted by demolator | April 12, 2007 12:42 PM
4

Most people who buy homes plan on being there for awhile unless they flip them. I've also known people who have gotten job offers in other cities right after buying a home and needed to sell it quickly. But most of the time they stay for 5+ years and upgrade, or just stay.

Just like any investment, you have to ride the bad spots. The history of the market is in their favor. And similiar to what Stephanie said, I don't know many renters who invest the money they're saving from renting and put it into stocks, mutual funds, or any other high interest-rate accounts.

Posted by Maverick | April 12, 2007 1:18 PM
5

What these and most calculators of this type fail to mention, is the most important part of the equation: EQUITY. For all the money you pay, you never get any renting, you are essentially paying the mortgage to your landlord and letting them collect all the equity your rent buys. In most markets (esp. ours!) the appreciation is BY FAR the best piece of the pie, since it serves as a great long-term savings plan just when retirement saving and the like has the bleak outlook it does now. For 18 years I rented from people who were of less means than myself, who gained hundreds of thousands of dollars in equity from my rent. I was a fool thinking I couldn't afford to buy.


I live on the eastside, and used to pay rather high rent, $1500/mo for a whole house in Kirkland. After 15 years of slightly lower rents in the Bay area, & 2 years of that up here I finally decided to buy, and ended up with a monthly payment of only $400/mo more for a house that was twice as big and recently appraised for 66% more than I paid for it, only FIVE years ago. It's stunning, I can sell it today and walk away with quite a big chunk of cash, tax free I might add.
Plus you get to deduct all the interest you pay on the loan, which is most of it. My fed net tax rate dropped by 8% because I can deduct most of that big monthly payment. That's more big cash that I never got to deduct before, when I took the standard deduction.


The numbers may be a bit daunting from this example, but the principle is the same: if you can swing it, you can buy and build up a nice nest egg rather easily. The banks offer 95% and better loans now if the usual 10-20% down payment is outta reach. That's what I did, since I didn't have any savings.
I know the market is nutty and the numbers seem scary, but if you pay what I did for rent, you can probably buy something, somewhere, and that's where the real money is. Renting is good if you don't want to stay put, but remember it is ALWAYS throwing your money (equity) away.

Posted by calvin | April 12, 2007 1:28 PM
6

The calculator is nearly useless without some sort of guidance on the numbers to input.
e.g. a 5% return on investment (for a portfolio with a similar 5-10 year commitment) is awfully conservative, the default inflation rate is a joke and property taxes and home price/annual rent ratios have to be localized for the results to mean anything for the average user.
Also it isn't clear how the calculator is treating the gains from having mortgages be tax deductible.
Lastly, as always, recent returns really aren't a great predictor of future returns. So setting the home appreciation rate to last year's rate (somewhere around 10% for the King County median) is a foolish move. It's certainly possible that 2007 will see the same increase in prices. But counting on those increase for 2008, 2009, etc. will lead to the sort of foreclosures we're now seeing in the midwest and south. Unless of course you just plan on finding a bigger sucker than you.

Posted by dirge | April 12, 2007 1:29 PM

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