Renting vs Buying a Home (Los Angeles, Pasadena: sales, real estate market, rentals)

[motoman]

Charles, look at a more average scenario.

Say the buyer stays in the place 7 years then sells. Using the same assumptions, the place would be worth $790,000 in 7 years. Closing costs at 10% would net you $711,000. You'd owe $528,000 on the mortgage, for a net net of $183,000. You would have paid $198,000 in interest (say $130,000 after taxes), $30,000+ in property taxes, etc. So your total cost would be $160,000+. You'd net $183,000 in the sale, but $72,000 of that is your own money. So total cash in your pocket of $183,000, but it cost you over $160,000, so a net of $23,000 or so.

The renter would have paid $162,000 in rent, just $2,000 more than the owner, yet would have $130,000 in savings at the end, an advantage of over $100,000 over the owner scenario. In just 7 years.

[motoman]

Originally Posted by Charles

Well then I guess that answers it; in a healthy, or normal economic housing environment, owning is the better idea unless someone is moving. It also supports what most everyone that can afford to buy a house does - they buy a house.

Correct. "Normal" is the key word.

Well, not just afford to buy. I could afford to pay more in rent than I do, but it doesn't make sense to me to double my "rent" just to say I "own" a place. I'd rather give my money to myself rather than the mortgage lender or the previous owner.

[Charles]

Originally Posted by motoman

Charles, look at a more average scenario.

Say the buyer stays in the place 7 years then sells. Using the same assumptions, the place would be worth $790,000 in 7 years. Closing costs at 10% would net you $711,000. You'd owe $528,000 on the mortgage, for a net net of $183,000. You would have paid $198,000 in interest (say $130,000 after taxes), $30,000+ in property taxes, etc. So your total cost would be $160,000+. You'd net $183,000 in the sale, but $72,000 of that is your own money. So total cash in your pocket of $183,000, but it cost you over $160,000, so a net of $23,000 or so.

The renter would have paid $162,000 in rent, just $2,000 more than the owner, yet would have $130,000 in savings at the end, an advantage of over $100,000 over the owner scenario. In just 7 years.

I didn't run the numbers (I am starting to get tired) but I trust your math and assumptions.

Since (or if) this is true, then why does everyone buy?

[motoman]

Originally Posted by Charles

I didn't run the numbers (I am starting to get tired) but I trust your math and assumptions.

Since (or if) this is true, then why does everyone buy?

Well, in this case in CA, for example, lots of people got caught up in the hype. It wasn't at all rational. Now many of those folks are in foreclosure or bankruptcy. So they didn't really buy.

Here is a quote from a study I quickly pulled up on the Internet. Source is census.gov:

"Thus, California’s homeownership overall is just 57.0 percent today [in 2005], 13 percent[age points] below that of the rest of the nation. [The rest of the nation was at 70% at the time.] California is one of only two states (the other is New York) where homeownership levels are less than 60 percent."

So everyone doesn't buy. Ony 57% of families do in California. Well, that was in 2005 when the bubble was happening. My guess is that the homeownership rate has fallen a bit since then.

[bhcompy]

Originally Posted by motoman

If my rent is half your mortgage, maintenance, property taxes, and insurance, how long would it take for me to catch up with you?

the price per square foot of my apartment vs my house im purchasing is a 2:1 ratio calculated at the monthly rate in todays dollars. 1400(sans renters ins) for 900sqft 2bd apt with no a/c and no insulation vs 1500(after interest, taxes, home owners and mortgage ins, hoa) for an 1800sqft 3bd with a new energy efficient a/c + new insulation. id say its a win win

[bhcompy]

to add, the condition of your average rental property(apts and houses), particularly in southern california, is very low. 30-100 year old properties that have little major renovation and provide you no opportunity to do fix that problem. a house you own can be rehabbed by yourself though, and after you rehab it, it will be worth more money than if you didnt, which is a bonus

[Charles]

Originally Posted by motoman

Well, in this case in CA, for example, lots of people got caught up in the hype. It wasn't at all rational. Now many of those folks are in foreclosure or bankruptcy. So they didn't really buy.

Here is a quote from a study I quickly pulled up on the Internet. Source is census.gov:

"Thus, California’s homeownership overall is just 57.0 percent today [in 2005], 13 percent[age points] below that of the rest of the nation. [The rest of the nation was at 70% at the time.] California is one of only two states (the other is New York) where homeownership levels are less than 60 percent."

So everyone doesn't buy. Ony 57% of families do in California. Well, that was in 2005 when the bubble was happening. My guess is that the homeownership rate has fallen a bit since then.

I guess I should have written "why do (most) people who can afford to buy, buy?" If you can afford to buy, then you can afford to rent. If renting is the better deal, then why buy?

[JustPassinThru]

Originally Posted by motoman

Charles, look at a more average scenario.

Say the buyer stays in the place 7 years then sells. Using the same assumptions, the place would be worth $790,000 in 7 years. Closing costs at 10% would net you $711,000. You'd owe $528,000 on the mortgage, for a net net of $183,000. You would have paid $198,000 in interest (say $130,000 after taxes), $30,000+ in property taxes, etc. So your total cost would be $160,000+. You'd net $183,000 in the sale, but $72,000 of that is your own money. So total cash in your pocket of $183,000, but it cost you over $160,000, so a net of $23,000 or so.

The renter would have paid $162,000 in rent, just $2,000 more than the owner, yet would have $130,000 in savings at the end, an advantage of over $100,000 over the owner scenario. In just 7 years.

If you consider what the renter saved then you must also consider what the owner saved, in mortgage and interest payments returned at the close of escrow. The owner has $183,000 in his pocket: the renter has only $130,000.
Plus, if the renter rents the same house in your example, he/she will pay the motgage, taxes, insurance and more, so the savings will not materialize.

There are good reasons to own, as well as rent. It depends upon the individual, of course. Each comes with its joys and headaches, but I've always preferred owning. The owner is free to put Dora wallpaper in the kids' room, while the renter has more free time to enjoy him/herself.

[Axiom]

I like this calculator for a quick comparison without going to the trouble of running all the numbers myself:

http://www.nytimes.com/2007/04/10/bu..._GRAPHIC.html#

It's not perfect, but if you plug in accurate numbers I think it does a decent job.

When I run the numbers for my So Cal neighborhood the result comes back that it would never be better to buy than to rent, even holding onto the house for 30 years.

Of course my neighborhood is still vastly overpriced and there are some nice rentals available at reasonable rates. You know; homeowners who would probably rather sell, but are waiting for the market to turn around because they don't want to give their house away.
They can afford to do it if they bought long enough ago, before prices got crazy.

As for why people buy instead of rent if it doesn't make good financial sense... IMO many people make the decision to purchase the most expensive asset they will ever own with no real financial analysis at all. The decision to buy a house is often primarily an emotional one. And don't discount greed as a factor, especially during price rallies like we've seen in CA in recent years.

Obviously plenty of people didn't spend much time or effort evaluating the costs of ownership to determine if it was the correct decision for them or we wouldn't be in the mess we are now. Of course there's plenty of blame to go around since lenders and gov policies enabled those bad decisions.

Anyway, this was a very long post when I could have just said I agree with motoman, at least given current rents/prices in my area.

[hsw]

Agree w/your overall logic, motoman

Most buyers don't properly value stuff like opportunity costs (ability to invest capital elsewhere), taxes and commissions, liquidity (ability to easily move for jobs or divorces, etc), risk of much of one's net worth tied up in a shack in a known quake zone, etc etc

And even in the inflationary '70s residential real estate offered lackluster risk-adjusted, real returns; would read Yale professor Robt Shiller's book analyzing real estate prices over past 50+ yrs...very insightful and clear in debunking many myths w/actual data

Most people are emotional, ill-informed investors, so they simply believe whatever nonsense realtors and idiot stockbrokers/mutual funds claim

Most w/kids need to buy a house not as an investment, but rather because few rentals of new houses exist in desirable suburbs and most families don't want to face risk of needing to periodically move if can't renew lease; so, buying, not renting, shelter is really a lifestyle choice or expense of raising a family, not an "investment"

That said, know many rather wealthy single financiers who share a dim view of any real estate as an investment; prefer to rent new condos or houses; and move every 3-4 yrs to next latest, greatest bldg; they prefer freedom of investing their capital in other, more liquid assets and ability to enjoy a new shelter every few yrs and not face maintenance hassles/costs/wasted time of >5yo shelter