Most online buying vs renting calculators err in one of two ways:

- It does not consider the opportunity cost of the downpayment, or
- It incorrectly inflates the tax benefit of taking a mortgage: a buying decision will only bring limited incremental tax benefit because one can claim standard deduction anyway and virtually no one can file itemized deduction without a sizable mortgage.

Looks correct, but I did not see periodic maintenace like house paint, boiler, carpet, windows etc. Some suggest to budget 1-2% of the whole house cost per year onn maintenance.
I just bought a 20-year-old fixer-upper for approximately 20% lower proce than somilar houses in good condition.

Thank you Elena. I'm buying a pretty new house so it does not matter much to me in the near future. After I bought the house in August, I did set up monthly accrual of home maintenance though. Thank you.

Don't forget that if you have to sell the house, you will lose 6% of the value of the house to the realtor, unless you sell it yourself.

"virtually no one can file itemized deduction without a sizable mortgage...."

Hmmm, not so sure about that...many would-be homebuyers have substantial state and local tax bills which are typically itemized once they exceed the standard deduction. In Montgomery Co. Maryland, a DC suburb with a state and local combined tax rate of just about 8%, a single taxpayer with an annual taxable income of just about $61,000 would benefit from itemizing her deductions. Therefore at the high end of the 25% tax bracket, and generally for single-filers in the 28% bracket and above, the typical calculator is right on the money and doesn't need to consider only the marginal tax benefit of the mortgage interest deduction.

"virtually no one can file itemized deduction without a sizable mortgage...."

Hmmm, not so sure about that...many would-be homebuyers have substantial state and local tax bills which are typically itemized once they exceed the standard deduction. In Montgomery Co. Maryland, a DC suburb with a state and local combined tax rate of just about 8%, a single taxpayer with an annual taxable income of just about $61,000 would benefit from itemizing her deductions. Therefore at the high end of the 25% tax bracket, and generally for single-filers in the 28% bracket and above, the typical calculator is right on the money and doesn't need to consider only the marginal tax benefit of the mortgage interest deduction.

I really like your thoughtful analysis. I think it is time to build a calculator so people can note the sensitivities you mentioned as to home appreciation as well as investment return on the opportunity cost side. Also, other selling costs in King County includ a nearly 2% excise tax you pay wether you have a realtor or not, and title insurance and escrow. I normally assume about a 10% loss upon sale in King County.

As always, your analysis is so professional, at academic research grade.

In light of the past comments and to make the model more fine tuned, here are some of my thoughts.
1) opportunity cost assumption for the downpayment can be benchmarked to the yield of US saving bond (I-bond), because both shared the tax-deferrable feature. In this sense, 4% seem very reasonable. However, risk-free rate is bit conservative. Alternatively, average after-tax return (in a taxable account) of stock market can be used, assuming the house is to be held for long time. Considering this, we can assume 6-7%.
2) for the point 1), the opportunity cost should be calculated for the home equity (downpayment plus all paid principals). The more equity you have in the house, the more you lose by not investing it otherwise.
3) Most people may have some itemized deductions other than mortgage interest. An amount of non-mortgage deductions should be excluded (say, $2000) from the standard deduction $9000.
4) Maintainence cost should definitely be included. However, this number is usually underestimated because the value of time people spent on housework are not considered. For a fair comparison against renting, either those hours should be valued at a reasonable wage, or the maintainence cost be valued assuming 100% the work are outsourced, including repair and depreciation cost of appliances, because renters don't pay for appliancnes.
5) House purchase seeking/closing time (as increment to renter's seeking time), buy and sell transaction cost (say 4%) should be annualized with average (or expected) house turnover rate.
This point can be significant and I doubt buying can be at advantage if one don't expect to live there for many years, given a reasonable non-bubble appreciation rate.

I agree that the most crucial parameter is the home appreciation rate, in relevance to the investment return rate (opportunity cost). In the february 2005 Money magazine, an article written by Robert J. Shiller, a Yale economics professor and the author of irrational exuberance, showed that US history return on house is just slightly higher than inflation rate (even including the current bubble market). Here is the text version but I encourage you to read the original article with beautiful table and graphs. http://money.cnn.com/2005/01/13/real_estate/realestate_shiller1_0502/

With such fact, I doubt buying is ever better than renting, except that home mortgage provide a discpline on personal finance to most people.

MM, please correct me if I miss something.