Tuesday, December 20, 2005

There Ain't No Fixed Rule

A lot of folks seem to be of the opinion that it is always better to buy real estate than to rent it (because renters are just "throwing their money away"). Well, bull. If a $10 million mansion were renting for $500/ a month, I think it's pretty obvious which is a better deal. Therefore the line exists somewhere. A housing bubble blog that I follow has a good post highlighting some current economic reality, in which renting seems to be by far the better deal:

When Renting Is Smarter

CNN Money looks at one rent or buy decision. "Andy and Kacey Olson and their four children moved to San Diego four months ago, where Andy had accepted a new position at a small biotech. They had $60,000 saved for a down payment. But when they toured one $750,000 home, they couldn't believe how small and unappealing it was."

"'Everyone told us to just get in and the rising market would take care of us,' Andy says. 'But I thought, who is going to buy this house from me for $850,000?'"

"They crunched a few numbers. This time they decided to rent, and they're saving a bundle. For $2,350 a month, they have a four bedroom, 2,100-square-foot home. If they were to purchase that same home today for $700,000 (the going rate for a similar house in the neighborhood), the monthly payment on a 30-year, $630,000 mortgage at 6.1 percent would run them more than $3,800."

"The rental market, in fact, can be an excellent tool for gauging the health (and risk) in a local market, particularly in cities where home prices have risen much faster than rents. Some experts look at the ratio of home price to rental income as a valuation tool, like the P/E for stocks. The statistics highlight some potential trouble spots."

"In New York, for instance, house prices have climbed to 24 times rental rates, up from 12 in the mid-1990s. In Los Angeles the ratio has grown to 20, up from 10. And in San Diego, where the Olsons live, the ratio now stands at 27, compared with 13 ten years ago."

"The Olsons are already glad they didn't jump in. They've noticed that houses in their neighborhood are staying on the market longer, and they've seen asking prices in real estate circulars come down. 'We'd rather be homeowners,' says Kacey. 'But we'll rent for as long as it makes sense financially.'"

It doesn't seem like that long ago that mortgage, maintenance, insurance, and tax payments really were lower than rents. But that sure as hell isn't now!


Michael Poole said...

From what I can tell, rents and mortagages here in the suburbs of Washington DC are still close to the same monthly costs. (My three-year-old mortgage costs me less per month than renting a comparable home would, but house prices in my neighborhood have gone up at least 50% in those three years.) As you look closer to the city, rents become a bigger and bigger win.

There does seem to be some downward correction in home prices taking place -- two doors down from me, a house has been on the market for more than a month, which was unheard of the past few years. They originally asked $400k, but apparently lowered their asking price; even at the lower price, someone who signed a contract to purchase it backed out.

I hope that the aggregate behavior will be the soft landing that some have predicted, where home prices stay level for a number of years before rising again, but when interest rates rise, I fear (and expect) that many homeowners will be unable to make their ARM or negative-amortization mortgage payments, leading to a supply glut and market crash.

Matteo said...

One of the more interesting dynamics I've been reading about is the number of "subject to sale of my other home" purchase contracts that are failing. It's kind of like deadlocked processes waiting for the same semaphore.

miriam said...

I sold my home under the condition that I find another place to live before moving out. It sold immediately.

The buyer exerted enormous pressure for us to move. We found another house. Then things slowed down at his end; he wasn't taking care of business.

Two months went by in which everything in house #1 broke--the hot water heater, the AC.

The big factors in choosing to own are two: I can do what I please with my property; and I can deduct taxes and interest from my income tax. Otherwise, the government would own ME.