Renting or Buying? Is This Still a Question?
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.)
| 2001 | 2002 | 2003 | 2004 | |
| Boston | 0.87 | 0.78 | 0.76 | 0.67 |
| Chicago | 0.84 | 0.77 | 0.75 | 0.72 |
| Las Vegas | 0.83 | 0.80 | 0.78 | 0.54 |
| New York | 0.85 | 0.78 | 0.77 | 0.71 |
| San Diego | 0.61 | 0.54 | 0.51 | 0.40 |
| San Francisco | 0.67 | 0.55 | 0.52 | 0.45 |
| Seattle | 0.60 | 0.58 | 0.57 | 0.51 |
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.
A study by two University of Chicago economists, discussed in depth in this New York Times article, questions whether real estate agents are well motivated to negotiate the best price for their clients. Read
According to a American Institute for Economic Research (AIER) study cited by Mototrend, the average American spends between $240,704 to $349,968 on automobile during their lifetime. This does not surprise me too much; after all, I spent a whole $7,504 last year to keep two ... Read
what you are paying for your home may be quite different from what a current home buyer pays. You may need to consider current home sales to recalculate the mortgage commitment. I don't know whether how much percentage down payment is taken account into the comparison. #s do change dramatically under different assumptions.
At this point in my life, I am more like a gypsy and move much too often, rent is my way of staying mobile and I also haven't gotten any bad deals yet.
Why would you rent? You are throwing away money. Buy the house and you get your money back (and then some) when you sell.
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