Once upon a time, it was a no-brainer, as soon as you had the down payment in hand, buying a house was perhaps the wisest financial decision you could make. The recent Great Recession changed that paradigm. We know now that home prices can go up, and they can go down. Any decision to go from being a renter to a buyer should include a careful financial analysis that weighs the choice of renting and home purchase. According to a recent New York Times article, home prices in many areas have experienced rapid increases recently which changes the financial arithmetic of the buy vs. rent decision.
The New York Times finds that in the country’s most expensive places, including New York, the San Francisco Bay Area and Los Angeles, buying a home again looks like a perilous investment, based on the relationship between their prices and rents or incomes. And in a longer list of areas, including Boston, Miami and Washington, prices have risen enough that buying is no longer the bargain it looked to be a few years ago. (Rent or Buy? The Math Is Changing – NYT May 21, 2014)
In the “Good Old Days”, it was OK to plunge into a home purchase. Even though your out-of-pocket expenses were greater than renting, the gain in the value of the property would more than offset the increase cost of owning. And one could assume increased earnings driven by higher inflation rates as well.
Sharpen Your Pencil
Well, things are different now. We know it’s not a given that a home’s worth will increase enough to justify the increased cost over renting. While it’s still a sound decision to purchase a home for many, it is prudent to examine the all the costs involved on both sides of the equation, owning & renting. And there are many to consider! Most of those associated with being an owner.
Maybe It’s Time to Sell
The analysis of buy vs. rent also works in the opposite direction. That is, maybe as a home owner, it’s a good time to sell and move into a rental home. The same NYT article above described a family in California that purchased home in the Los Angeles area four years ago and sold it recently at a tidy profit.
Billy Gasparino and Jenna Dillon-Gasparino were savvy enough to wait out the housing boom of a decade ago as renters. Not until 2010, well into the bust, did they buy a house in the Venice neighborhood of Los Angeles, less than a mile from the beach, for $810,000.
Only four years later, the couple see new signs of excess in the housing market and have decided to go back to renting. They are close to a deal to sell their house – for $1.35 million, a cool 67 percent gain. (Rent or Buy? The Math Is Changing – NYT May 21, 2014)
So the Question of Owning or Renting is Worth Taking a Look At, for Owners and Renters
Ah, but you say that’s too hard to do, too much math! The NYT has your back!
The choice between buying a home and renting one is among the biggest financial decisions that many adults make. But the costs of buying are more varied and complicated than for renting, making it hard to tell which is a better deal. To help you answer this question, our calculator takes the most important costs associated with buying a house and computes the equivalent monthly rent. (Is It Better to Rent or Buy? – NYT)
Easy to Use
The NYT calcualtor Is It Better to Rent or Buy? is not hard to understand, or use. It includes the important factors that affect the financial equation of the rent vs. buy decision. You select the value of a factor like, say mortgage interest rate by using a slider. As you move the slider across a range of interest rates, the break-even monthly rental is constantly changing to reflect the changing interest rates you are positioning the slider on.
To illustrate the comprehensive coverage that the NYT calculator includes in its computations, here is a list of the factors that go into the calculations, and that you can change to checkout any number of cases for your own consideration.
- Home Price
- How Long Do You Plan to Stay?
- Mortgage rate
- Down payment
- Length of loan
- Home price growth rate
- Rent growth rate
- Investment return rate
- Inflation rate
- Property tax rate
- Marginal tax rate
- Closing costs of buying
- Closing costs of selling
- Maintenance & renovation costs
- Homeowners insurance
- Common fees
- Rental security deposit
- Brokers fee
- Renter’s insurance
Don’t know all these values, that’s OK
You are probably saying, “I don’t know all those figures”. That’s okay, the calculator starts with a number that’s a reasonable estimate for each factor. You can change it if you have a more accurate value for you case, or leave it as is.
Give It a Try
If you already own your home, check out what you would have to pay in rent to have what you have now.
And It’s on Our Tool Page
Just in case you can’t check it out right now, simply remember that the Rent or Buy Calculator is listed on our Tool Page. Come back anytime to the Tri-Town Apple and select “Tools” from the menu at the top of the Home Page. You’ll find this calculator under “Online Calculators“.
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