Homeownership is such an important part of the American dream. So, is renting vs buying still a question? What if renting is much cheaper?

According to a study prepared by Torto Wheaton Research for WSJ, "the gap between the cost of renting and the cost of buying in some markets is at its biggest since at least 1994, ... and by some accounts at its biggest since the 1970s."

Take a look at the numbers. Will you consider renting if you know it will be 60% cheaper than buying?

(Ratio is cost of renting as % of cost of buying. A ratio above 1 means the cost to rent is more expensive, while a ratio below 1 means the cost to buy is more expensive.)

A couple of additional comments:

1. Use the numbers with a grain of salt. According to the footnote, to calculate the ratio, "[t]he cost of buying includes only the principal and interest payment on a 30-year mortgage and excludes all other expenses, such as insurance and property taxes as well as the tax breaks a homeowner receives." Personally, I feel the excluded insurance, property tax and maintenance cost should be higher than the mortgage interest tax break for most people. On the other hand, the difference may be minimal if ARM is used to finance the home instead of the 30-year fixed rate mortgage. Plus, it is almost unreasonable to include the principal portion of the mortgage payment as part of the comparison -- principal increases homeowner's equity and it is, at most, a cashflow concern instead of a net cost line item.

2. To be honest, the Seattle number is out of my imagination. In my personal example, my homeownership cost will be approximately $15,800 in 2005, or $1,316 a month. ($8,600 for mortgage interest, $3,600 for property tax, $500 for home insurance, $3,600 for maintenance accrual, and minus $500 from tax benefit.) My house can easily rent out at $1,500 a month, if not more. So my ratio will be in the north of 1.13. Of course, I should thank my ultra-low 5/1 mortgage at 3.50% for the next four years. (If I use Torso Wheaton Research's methodology, my monthly mortgage payment of $1,118 will push the ratio to 1.35.)

3. For an even fairer comparison, include the opportunity cost of the home equity. For me, it's about $120,000 based on market price. At 6% annual return rate, the cost is about $7,200, or $600 a month. Now the comparison is up-side-down at about $1,916/month for buying and $1,500/month for rent. (Well, I don't think buying is an inferior deal for me. After all, I never spend $3,600 a year on my four-year-old house and if I need to rent, I probably need to pay more than $1,500.)

4. For a complete model, try out my earlier post of Complete Financial Model of House Buying vs Renting.