Following up on my recent Renter's Manifesto, here is an interesting article in the New York Times recommending that renting is a better option than buying in the current housing market (emphasis mine):
...in a stark reversal, it’s now clear that people who chose renting over buying in the last two years made the right move. In much of the country, including large parts of the Northeast, California, Florida and the Southwest, recent home buyers have faced higher monthly costs than renters and have lost money on their investment in the meantime. It’s almost as if they have thrown money away, an insult once reserved for renters.
...even though rents have recently jumped, the costs that come with buying a home — mortgage payments, property taxes, fees to real estate agents — remain a lot higher than the costs of renting. So buyers in many places are basically betting that home prices will rise smartly in the near future.
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.
...buying has never been quite as beneficial as Realtors — and mortgage brokers, home builders and everybody else who makes money off home purchases — have made it out to be. Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill. Buyers also face thousands of dollars in closing costs (and, in Manhattan, co-op charges). Renters, meanwhile, can invest what they would have spent on closing costs and a down payment in the stock market, which hasn’t exactly delivered a bad return over the last 20 years.
And that famous mortgage-interest tax deduction? Yes, it reduces the borrowing costs that come with a mortgage, but it doesn’t eliminate them.
Read the whole thing. Also take a look at this excellent calculator for renting vs. buying that accompanies the article. I think the calculations might surprise you.
P.S. -- Just for fun, I compared renting vs. buying for the last 1-bedroom apartment I lived in down in Orlando. My rent for was ~ $725 for a perfect location -- only two miles from work, two stop lights away from The Mall at Millenia, about a mile away from my church, even closer to I-4, and only one exit away from the Florida Turnpike (which made for the quickest commute I could have had for driving up to Gainesville when I was getting my MBA). On top of that, I had a third floor unit with vaulted ceilings a screened in balcony with a wooded view, swimming pools, tennis courts, a fitness center, and virtually no maintenance other than cleaning (which didn't take long because of the size). Disney, Universal Studios, and Sea World were all within about 25 minutes and downtown was about 10-15 minutes away.
In contrast, the typical 3-bedroom house in Orlando was going for ~ $250,000 by the time I left and would have been in a much less ideal location. According to the New York Times' calculator, I wouldn't have broken-even in 30 years if I had bought a home.
Granted I'm contrasting a 1-bedroom apartment to a 3-bedroom house, but that's all the space I needed. This analysis doesn't factor in the value of time I saved commuting and doing maintenance by keeping a simple lifestyle in a prime location.
P.P.S. -- For any renters out there, here is a list of good things to know about your legal rights as a renter.
2 comments:
First, of course over the last year or so, when the housing bubble burst and some people have had their home values decline, it will seem that buying isn't so great. But that's shortsighted. The same thing could have been said when the stock market bubble burst, but look, it's back with a force.
Second, I don't know if the analysis takes into account that with housing payments you build equity. In other words, if and when you sell, you get at least some of that money you spent on housing back. Of course it's difficult to work that into the analysis, since when homeowners sell obviously varies greatly.
And if you don't sell over the long term, you can actually pay off your house and then live for far less than renting.
And sure, if renters invest those closing costs and downpayment in the stock market, they might be better off. But realistically, how many do that? Plus, many purchase a home with very little or no downpayment these days, so that savings never exists.
Then there's the fact that most rental situations require a sizable security deposit. One could say that properly invested that amount of money would grow over time.
Real estate, over time, will always be a good investment. The supply is fixed, the demand is growing. There are so many cases of people owning a home over a long period of time and being able to sell that home for many times what they paid for it.
Now granted, there are other lifestyle choices that may make renting better suited for an individual than buying, but from an economic perspective, buying is still a very viable option.
Here's another way to think of it: when you rent, all of the costs associated with owning...mortgage, taxes, repairs, upkeep, etc. are all passed onto the renter by the property owner. On top of that, the property owner takes a profit, usually a considerable one. It's just that this is all rolled up into one neat monthly payment and so seems so much easier to manage.
So the costs are the same as ownership, plus the cost of supplying a profit to the property owners and managers. Therefore, renters pay more. The only reason why rent may seem more affordable is because the property rented to an individual renter may be so much smaller than a house. But then you are getting less, so on nominal terms, you pay less. But overall, the costs are higher when all renters are taken into account. It has to be this way, or else the property owners are losing money.
Here's another way to look at it: suppose you own a home and rent it out. You will determine the rent you charge by adding up all of your monthly expenses of ownership, then tacking on your profit. So the renter pays more for renting that home than you do for owning it. Therefore, the renter pays more for renting than if that renter owned that home or something comparable.
Why does the renter pay more? Presumably, because he/she perceives value in the ease of entry/exit afforded by renting. The owner absorbs the long term commitment, and any long term risks, and passes that cost along to the renter with a profit incentive built in.
By definition, the renter pays more.
To clarify my rather long discourse in my previous post:
Renting will always be more costly than owning for any given good, by definition, or else there would be no rental market.
The owner that rents out a property or good, whether it be real estate, an automobile, a TV, etc., will always pass along 100% of the cost of ownership to the renters, along with a premium for managing and maintaining said property or good, along with a premium for absorbing the risk of long term ownership.
The only way the renter pays less than the owner is if the owner is losing money on the deal, which obviously does not happen.
Consider the rental market for cars, or for furniture, computers, TVs, etc. Any consumer advocate will tell you that renting these items is more costly in the long run than owning them, and usually substantially more costly.
It would be very unique if the real estate market somehow functioned differently than all of these other markets when it came to renting. Indeed, it does not and cannot, for if so then no one would own.
What may make the comparison harder to see in real estate is that usually apartments that are rented are much smaller than homes that are purchased, and so renting may seem more inexpensive. But that's comparing apples to oranges then. If you compare the cost of owning any given property with the cost of renting a comparable property, renting will always be a more costly proposition. Then there is the fact that when you walk away from a rental unit, you leave with nothing...there is no return on equity. It is as if you owned a property for a given period of time, paid your mortgage payment, but then sold it for zero dollars.
One abiding principle of any capitalistic system is that ownership of the capital is the most desired position, and the one that pays the largest rewards. In any free market system, ownership is a huge advantage.
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