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The numbers quoted in that article are pretty specifically chosen to say one particular thing that is not true in all markets, and they don't do a very good job about saying that.
Here's what they say: RentingBuying Rent/Mortgage: $1,495$2,093Insurance:$20$163Property Tax:-$407Tax Savings[SIZE=1]*[/SIZE]:-($327)Maintenance:-$354Total:$1,515$2,690
I disagree that this is a good representative comparison.
For example, when I bought my house, I moved out of an apartment complex.
I went from around 800 sq.ft., 2 small bedrooms, 1 bath, no garage at $675 per month to 1250 sq.ft, 2 bedrooms, an office, 2 bathrooms, and a 2 car garage only a mile away for $750 per month (that's total payment, not just P&I, P&I is only $630)
My insurance went from $10/ month renters insurance to around $25/ month homeowners insurance.
My taxes are about $75/ month.
I don't have a tax savings, because I don't itemize.
My maintenance expenses went from around $20/month (renters still have some maintenance expenses, such as lightbulbs, batteries, filters, etc) to maybe $50/month, but I can see averaging big long term repairs over a long time and calling that $200/month.
So, I went from $675+$10+$20 = $705/month as a renter
to $630+$25+$75+$200 = $930/month as an owner, for more space, a garage and a yard.
And that's figuring long term expenses in every month. Most months, I'm at around $780, which is barely more than I was as a renter.
Point is, the article makes it sound like being an owner HAS to be more expensive than being a renter, and that isn't always the case.
The numbers quoted in that article are pretty specifically chosen to say one particular thing that is not true in all markets, and they don't do a very good job about saying that.
Here's what they say: RentingBuying Rent/Mortgage: $1,495$2,093Insurance:$20$163Property Tax:-$407Tax Savings[SIZE=1]*[/SIZE]:-($327)Maintenance:-$354Total:$1,515$2,690
I disagree that this is a good representative comparison.
For example, when I bought my house, I moved out of an apartment complex.
I went from around 800 sq.ft., 2 small bedrooms, 1 bath, no garage at $675 per month to 1250 sq.ft, 2 bedrooms, an office, 2 bathrooms, and a 2 car garage only a mile away for $750 per month (that's total payment, not just P&I, P&I is only $630)
My insurance went from $10/ month renters insurance to around $25/ month homeowners insurance.
My taxes are about $75/ month.
I don't have a tax savings, because I don't itemize.
My maintenance expenses went from around $20/month (renters still have some maintenance expenses, such as lightbulbs, batteries, filters, etc) to maybe $50/month, but I can see averaging big long term repairs over a long time and calling that $200/month.
So, I went from $675+$10+$20 = $705/month as a renter
to $630+$25+$75+$200 = $930/month as an owner, for more space, a garage and a yard.
And that's figuring long term expenses in every month. Most months, I'm at around $780, which is barely more than I was as a renter.
Point is, the article makes it sound like being an owner HAS to be more expensive than being a renter, and that isn't always the case.
I don't follow you.
You bought your house six years ago, didn't you?
Maybe I'm misunderstanding, but I don't think anyone is arguing that renting in 2003 was cheaper than buying in 2003. I believe the discussion revolves around 2009 values.
But what the article doesn't point out is that rent goes up each year and a mortgage stays the same.
This isn't always true. Rents in many places are going down as the market is flooded with sellers who decided to rent their houses out for a few years, first time investors who couldn't resist a deal, and so on.
This trend probably isn't going to continue long term, but it's another variable to consider compared to fixed mortgage payments.
And I'd reiterate that great appreciation numbers if you bought 5 or 10 years ago isn't an argument for buying instead of renting today. If anything, above average appreciation is a hint that renting is probably a better deal now than it has been in the past.
If I purchased this place, it would be:
taxes $221.50 / month
insurance $291.50 / month
PI $2,013/month (If I bought it for a steal, and financed at 5%)
So a conservative estimate for buying = $2,526/month
The only reason that me & my landlord are "on the same page", so to speak, is that he bought the land in 1982 and built the house in 1998. He has no mortgage; so while most of the landlords/homeowners on the island are drowning in carrying costs, trying (and failing) to rent units for $3,000/mo when people can't even afford $1,500/mo, me and my landlord are both in a win-win situation.
Maybe I'm misunderstanding, but I don't think anyone is arguing that renting in 2003 was cheaper than buying in 2003. I believe the discussion revolves around 2009 values.
Ok, for the same example today, all the dollar figures in my area would be roughly the same, except the rents are higher now than they were. The same apartment today rents for $725.
And because of the economy, my house isn't worth much more today than it was 6 years ago, so that side of the equation would be roughly the same.
So if anything, it becomes even more beneficial in my market to buy rather than rent if you can find the right deal.
Anyway, I didn't see anything in the article about specifically being a "today's economy" thing, it seemed more of a renting vs buying in general type story to me.
Couple things -
1. The example in the article uses bubble inflated Seattle as an example. In real estate bubbles the purchase premium always grows as prices increase faster then rents. In markets that have had, or receeded to a more historically normal price to rent ratios his example would be even weaker. As many posters have pointed out, a more balanced real estate market yeilds a very different result.
2. This article made me think so I built a spreadsheet to run some numbers and here's what I came up with. If you assume 4% annual increase in rent, associated costs of ownership (taxes, maintainence, ins, Etc) and appreciation and assumed an 8% return on investment for all money invested, mostly the down payment savings for the renter and the difference betwwen the monthly rent v. ownership costs (all compounded annually) this is what you get:
-The owner pays more out of pocket costs over 30 years then the renter, just over $130k more.
- After the 30 years the renters $85k he invested in the market instead of using it for the down payment is now worth $678k.
-After 30 years of investing the difference of rent v. owning is +$151k to the renters advantage.
- After 30 years the house is worth $980k.
- Net net the homeowner comes out $21k ahead (980-678-130-151).
Given that I compounded the numbers annually and most of the savings acrue to the renters advantage, a more precise model would probably put the equation at a wash.
However, the homeowner now owns the home free and clear in his/her retirement. Their monthly housing cost falls to $1021. The renter is looking at how to pay a $5582 monthly rent during their "golden years"
So even in the inflated market used in this example, the homeowner still comes out even after 30 years and way ahead over a lifetime as the savings from years 31 and on will continue to accrue and help enable their retirement.
After the 30 years the renters $85k he invested in the market instead of using it for the down payment is now worth $678k.
Are you taking out taxes from this number or adjusting for inflation? 85,000 * 1.08^30 is 855K after 30 years.
And are you compounding the annual savings in rent vs owning costs? When I compound them at 4% (to estimate 8% over the year but put in monthly) I get about a 2.2 million dollar cash balance for the renter at the end of 30 years compared to a house value of about 1.4 million (minus RE commissions and taxes when they sell, which will be ~$150K).
Quote:
Their monthly housing cost falls to $1021. The renter is looking at how to pay a $5582 monthly rent during their "golden years"
I'm not sure where either number comes from. Taxes + insurance + maint is nearly $3K a year after 4% appreciation over 30 years. The renter is paying about $5K ((1495+20)*1.04^30=4914) a month, which is nothing since he's earning nearly $175,000 a year in interest at that point. He can use that interest to pay for his housing expenses and never run out of money.
It looks like about 5.5% after tax return is the break even point between these two individuals.
My favorite tool for looking at this is at http://www.nytimes.com/2007/04/10/bu...T_GRAPHIC.html. You'll see the biggest factors are purchase price and expected price appreciation. Considering the current RE climate, being optimistic on either of these could get you into trouble pretty quickly.
Couple things -
1. The example in the article uses bubble inflated Seattle as an example. In real estate bubbles the purchase premium always grows as prices increase faster then rents. In markets that have had, or receeded to a more historically normal price to rent ratios his example would be even weaker. As many posters have pointed out, a more balanced real estate market yeilds a very different result.
2. This article made me think so I built a spreadsheet to run some numbers and here's what I came up with. If you assume 4% annual increase in rent, associated costs of ownership (taxes, maintainence, ins, Etc) and appreciation and assumed an 8% return on investment for all money invested, mostly the down payment savings for the renter and the difference betwwen the monthly rent v. ownership costs (all compounded annually) this is what you get:
-The owner pays more out of pocket costs over 30 years then the renter, just over $130k more.
- After the 30 years the renters $85k he invested in the market instead of using it for the down payment is now worth $678k.
-After 30 years of investing the difference of rent v. owning is +$151k to the renters advantage.
- After 30 years the house is worth $980k.
- Net net the homeowner comes out $21k ahead (980-678-130-151).
Given that I compounded the numbers annually and most of the savings acrue to the renters advantage, a more precise model would probably put the equation at a wash.
However, the homeowner now owns the home free and clear in his/her retirement. Their monthly housing cost falls to $1021. The renter is looking at how to pay a $5582 monthly rent during their "golden years"
So even in the inflated market used in this example, the homeowner still comes out even after 30 years and way ahead over a lifetime as the savings from years 31 and on will continue to accrue and help enable their retirement.
Does your analysis assume that the home owner never moves in 30 years ? The average home owner in my area moves every 6-7 years, and they get hit with about 6% of current home value in transaction costs with each sale.
If a renter in a place like New York had gotten a rent stabilized place 30 years ago, they would be paying a ridiculously low rent today.
Also, the home owner is not "free and clear" when the mortgage is paid off. They still have to pay property taxes.
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