There Is Such A Thing As 'Too Expensive'

Some real estate objectivity:

“Friends of mine recently moved into a single family home that was purchased just a few months back. They pay $1,900 per month to rent a home that was purchased for $535,000. First we will assume that, had our friends purchased the home themselves, they would have financed the entire purchase price with a 30-year mortgage at the most recent average rate of 6.6 percent. For simplicity’s sake, let’s just say they got that great rate on the full loan amount.”

“If these folks had purchased the home in the manner described above, they would have been responsible for the following monthly outlays: Mortgage principal: $474. Mortgage interest: $2,943. Property tax: $490. Insurance: $100.”

“Once we make (some) final tweaks, we see that the purchaser of this home would be divesting himself of just a bit over $2,500 per month. In addition to the assumption of very favorable tax and insurance rates, this $2,500 per month figure is predicated on the idea that the 80-year-old home will require no maintenance.”

“The renter who is shelling out only $1,900 each month seems to be getting a deal. Even under our unrealistically cheerful assumptions, it would cost 32 percent more each month to own the place than to rent it. Put another way, the buyer would be out an extra $7,200 each year.”

“The standard objections to renting make little sense in a situation like this. Take the old saw that ‘renters are just paying their landlord’s mortgage.’ In fact, they are not coming close. They are only paying enough to cover the after-tax mortgage interest, hardly the renter-to-landlord transfer of wealth that the saying would imply.”

“Similarly, renters are often told that they ’should be building equity.’ But who is the one building equity in this situation? I would posit that it’s the renter who saves $7,200 each year by choosing not to own. A yearly savings of $7,200, wisely invested, will make for a nice little down payment when home prices finally move back into line with rents. (Remember down payments? Yeah, they’ll be back eventually.)”

“What arguments of this type fail to take into account is that homebuyers are themselves renters, it’s just that instead of renting homes, they are renting money from the bank. And when homes cost so much that the ‘rent’ on the money required to purchase a home, otherwise known as the mortgage interest, is more than the rent required to simply live in that same home, aphorisms like these cease to apply.”