Addressing the Rent vs. Buy Conundrum
September 24th, 2007
This Sunday, The Oregonian published a timely article by Julie Tripp entitled, To buy or to rent?.
Over the past few years, the answer to the rent vs. buy question has unequivocally been BUY. Easy financing, scorching year-over-year appreciation, and a high in-migration rate has meant that most home buyers could bail out or turn their property quickly–often at a profit after just one year.
But the recent sluggish market calls that strategy into question, even in the healthier-than-the-national-average Portland area.
Call me conservative, but even at the peak of the housing boom in Portland, I cautioned buyers that their minimum window of occupancy needed to be at least two years. Capital gains tax could chew into their proceeds, and secondly, the closing costs associated with both the original purchase and the impending sale would devour much of the equity appreciation.
Now, the discussion tends to be more about waiting for deeper price reductions in the market (so as not to catch the falling knife, as one reader put it) or simply renting to avoid all the uncertainty. So, is it better to rent and invest (assuming you’re disciplined!) the down payment plus the monthly difference in payment in say, the stock market?
The New York Times has an elegant calculator that you can use to evaluate the rent vs. buy decision for yourself.
The calculator starts with some basic defaults (monthly rent, % down payment, property taxes, etc.) that you can update as you see fit. Additional factors can be tweaked with the Advanced Settings links. Sliders control the amount of sales appreciation and/or rent increases. For some perspective, Portland’s housing market has appreciated around 8 percent annually since 1973. (You can contact me with questions about other variables specific to Oregon.)
In the Oregonian’s real world example, the break-even was 2.7 years in purely financial terms, which sounds about right to me (in most cases).
In most cases, the decision isn’t purely financially-driven. But the numbers can help ‘justify’ the intangible factors of pride of ownership and creating a sense of community and permanence.
Technorati Tags: Portland, Oregon, rent, rentals, homes, appreciation, investment, purchase, calculator, Oregonian
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
Related posts:
- Guest Post: Half is More?
- Moving? Consider the Cost (of Living, that is)
- The Power and Peril of Interest-Only Loans
Entry Filed under: First-Time Buyers, Mortgages
5 Comments Add your own
1. Paul | September 24th, 2007 at 9:52 pm
The NYTimes model is strongly effected by the return on investments rate. Presuming the discount you receive from renting were placed in an aggressively managed account - even index mutual funds - the benefit of owning is diminished. The NYTimes default return is 5% - but over a 30 year period one can do much better. This opportunity cost should be the driving factor in this sort of investment.
Another interesting issue is that today’s federal tax rates are some of the lowest in history - so the power of deducting mortgage interest are minimized. If taxes come up then the benefit for purchasing will come back to the entry level buyer who today is likely not paying much in taxes. (Of course the wealthiest groups have seen a slow increase, and more and more are hit by AMT…. But thats another story.)
2. The Odysseus Medal compet&hellip | September 30th, 2007 at 11:08 am
[...] RealUmbrella, Creating the Ultimate Real Estate DisintermediatorRon Ares — Rent vs buy, Addressing the Rent vs. Buy ConundrumSteve Leung — Hidden factors, Hidden Factors When Calculating a Home’s ValueKevin Boer [...]
3. Alex | September 30th, 2007 at 7:45 pm
Rent has gone up and will go up again. The vacancy rate is really low right now.
4. Uncle Git | October 11th, 2007 at 12:47 pm
Your example of 7% a year going forward isn’t going to happen.
The reality is house prices are now dropping from the biggest financing bubble we’ve ever seen - you’d be safer assuming 0% for the next 10-15 years to account for the fall and inflation eroding that fall away to get back to today’s prices.
Fact of the matter is it just doesn’t make sense to buy in Portland today - end of story.
5. Portland Oregon Real Estate Guy | December 18th, 2007 at 12:22 am
It always makes sense to buy, if you can get it at the right price. Most people are scared to buy, so the inventory is high. But the investors are really ripping into the short sale market right now. Imagine if you can buy a home at 75% loan to value. Different market different opportunity.
Leave a Comment
Some HTML allowed:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Trackback this post | Subscribe to the comments via RSS Feed