[photopress:adv.jpg,thumb,alignright]As with most of my blog articles, I am writing to a specific young woman who is suffering from advice and information overload. In a lot of ways, deciding where, when and whether or not to buy vs. rent, is as personal a decision as choosing a mate. Sure, everyone wants to tell you how they feel about that new boyfriend, just as they want to tell you where and how to live. But at the end of the day, you are the one who needs to live with your choices.
Friends, co-workers, parents, siblings everyone becomes a real estate expert over cocktails. With Thanksgiving and “The holidays” around the corner, it’s time to come to terms with how YOU feel about the prospect of purchasing that condo or continuing to rent, before everyone and their mother starts putting in their $.02 about what you should do.
You have dipped your toe into the real estate market. You have seen what your choices are. You hear all of your friends talking about their purchases and how much money they have “made” since they purchased. Well, first let me tell you that these are just stories. They haven’t sold their condos. They are talking gross not net, and they are assuming that they could sell their place today for what they think a buyer would pay. None of it is real, and clearly none of it has anything to do with you.
Your friend referred you to me, and so I get to be one of the many who gets to put my $.02 into the equation. So here are my thoughts for you, and you alone. I watch my clients closely. I feel their emotion more than I listen to their words. Your brief experience into the real estate market, leads to the conclusion that you might be happier someplace else. That someplace else is more expensive, than buying where you live right now, and buying there is more than you want to spend. So consider renting there instead. Often that third, middle of the road option, is the right one. Rent there. Move. Try that neighborhood on for size.
By the time your lease is up there, you will know better whether or not you are going to change jobs, and where that job will be. By the time your lease is up there, you will know better if your current relationship is going to a place where you, together, will be deciding where and what to buy. In your circumstance, a year from now will bring many changes. Perhaps more certainties…or more uncertainties. But this I know for sure. If you try that neighborhood now, the monthly cost to rent there, will be less than buying either here or there. If you try that neighborhood now, you may find that the differences between your current neighborhood and that neighborhood are not worth the added cost…or that they are in fact well worth the cost differential.
Anyway you look at it, by moving there now, into a rental, you will have more information later than you have now. Real information based on your personal happiness factor…and not just everyone’s “opinion”.
Good advice, Ardell. Never thought I’d hear a Realtor telling someone to rent. 😉
No kidding. Good job!
Why own when you can rent for 1/2 the price – save up a bit of money and buy back into the market when the market returns to the mean – fundamentals. (1997 prices + 3.5% appreciation per year)
Synthetik,
One small correction. The rent there is not half the cost of buying, more like 2/3rds. And she loses the tax write off, so cost is not the primary factor. Better to test the neighborhood and get a better handle on where her life is headed, and what she really wants to do, before proceeding.
As to 1997 prices…I sure hope you are right as to Southern California. I’d love to buy a home on the beach at 1997 prices for weekend getaways from this rain! Is it ever going to stop?
I checked the market in Manhattan Beach, CA and it seems to be flat or down since 4/06. Can’t say the same for Seattle though. A condo I found for a client in April of this year, is up over 20% since then. Clearly not parallel markets.
Hi Ardell,
I think we’ve talked about buy vs. rent before. In any case, it’s alot more complicated than a back of the envelope analysis. And forget the cocktail conversations.
As it turns out, I spent a lot of time building a new buy vs rent financial model a few weeks ago. I posted the revisedmodel on google spreadsheets and it was picked up by the Big PIcture which resulted in a flood of traffic. Based on the comments I received, I completely overhauled the model again (now, Excel only). The current version (2.2) has 19 variables a user can input. Everything you’d expect… purchase price, holding period, appreciation rates, and much much more. I built in sensitivity analysis so you can see how six specific variables cam impact your bottom line. I also put in a appreciation curve option, so you can factor for a down market if that’s what you think will happen in the short term.
As you might guess, renting wins for short holding periods in a market with flat appreciation. It also doesn’t take much appreciation for a buyer to do better in the long run. Anyway, even now (a few weeks later) I’m suprised that I’m getting 10-15 requests a week for a copy of the model. Seems many people are looking to do the math.
If you to play around with my financial model, feel free to contact me for a free copy.
p.s. With my analyst background, I’ve literally built hundreds of financial models over the years. From what I’ve found, my model is a little more sophisticated than what you’ll generally find available.
[legal crap] Despite the fact that I’m fairly confident in the robustness and accuracy of my model, it’s possible there are errors and thus, no guarantee of results. The model takes your predictions and spits out an estimated loss or gain from buying vs. renting. Consult your professional advisors before making a real estate decision. I am in now way responsible for decisions resulting from the use of my financial model.
Ardell,
Good advice. Do you also counsel “trial run” renters to live on the home-purchased budget? If the cost of renting is really 2/3 that of buying, advising these potential buyers to spend that year or more renting living like they purchased (finance-wise) seems to make a lot of sense.
At least that way, they can see just how much their budget would be stretched without the possibility of missed payments, foreclosure, etc. Additionally, by putting the excess cost of purchasing into savings each month, they will have that much more to take to the table as a downpayment, etc.
Also,
Can someone explain to me to the all-powerful and wonderous benefits of the mortgage interest tax write-off?
Seriously, this “benefit” seems to get way, way more hype that it really deserves. In the end, all it is doing is lowering your effective interest rate. Is this a good thing, sure. It is all that AND a bag of chips? Hardly! You are still paying for debt service.
Flopfolder,
In this particular case, testing the new payment was not a factor given the amount saved while renting, and the income level. I did feel that another year of paying down student loans would make this client feel better about purchasing. But affordability was not a factor.
I have counseled people who are zero down (have saved no money to date) and who are increasing their $800 a month rent payment to a $2,000 a month housing payment, to “walk the walk” by saving $1,200 a month for at least three and preferably six months before purchasing. Can’t say they all listen to me though and usually they find another agent to work with who doesn’t act like their mother 🙂 That’s OK. Different strokes for different folks.
Flopfolder,
Lowering the overall average tax rate is not so much the issue, as the “marginal” rate, which is the rate at which the last dollar in is taxed. In extremely high income brackets, the earner keeps 62% of every “last dollar” earned. For many people with reasonably high incomes, the marginal rate is 30%, meaning they keep 70% of every dollar earned at the top of the scale.
If someone whose taxable income is $84,000 can reduce that taxable income to $74,000 with $10,000 in write offs, they save $3,000 or 30% of that last $10,000 earned. The first dollar is taxed at 0. The last dollar is taxed at 30% at that income level. The savings is thirty cents on the dollar for every dollar removed from the top, with a write off.
Ardell,
I understand how a tiered tax system works. What I don’t get is why this benefit is so hyped.
Lets use the numbers for your scenario (assuming renting is 2/3 cost of buying, as stated in your post):
By “cost” I will generously assume the following:
Homeowner costs = mortgage interest, upkeep and property taxes
Renter costs = rent
Note: I do NOT include principle payment as a cost since it is simply a transfer in assets from one class (cash) to another (home equity).
If you use these metrics for cost, one can clearly see that even when our homeowner saves to full 30%, he does not even break even with the cost of renting.
So, when does it make sense to buy a house? When rental of an equivalent property is roughly equal to interest, taxes, fees and upkeep. It doesn’t have to be exactly equivalent, as one must also factor in appreciation (think rate of inflation) and the fact that mortgage interest will decline over time and rent will increase over time.
I don’t have the data in front of me to do a model, but something like a 10-15% homeownership premium seems about right. That is just an estimation though and I am open to being wrong about it.
Given that and depending on interest rates and a number of other factors, the buying makes sense when the price of the home is about 200 months of equivalent rent.
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Flopfolder,
Your last comment dragged the entire conversation into a “rent vs. buy” scenario. That model doesn’t work here by and large.
I explained the tax benefit to answer your previous question, but no one should buy simply to save taxes. It is only one of the factors involved, and often the one so insignificant that it is not mentioned at all…by me anyway.
In this particular case it deserved some consideration because the area was Downtown Kirkland. The rents are very high here for the most part. Some of the condo conversions in the same area as these high rentals, with two bedrooms and two baths at almost 1,000 square feet cost $300,000 to $350,000. At those prices vs. the high rents here, we can begin to equivocate monthly rent to mortgage payment. But that is not the norm everywhere.
No one size fits all real estate. Downtown Seattle where a small one bedroom costs $300,000 to $350,000 vs. the 2 bed, 2 bath with almost 1,000 square feet in downtown Kirkland for a condo conversion, begs a different comparison altogether.
Very, very few examples where rent vs. buy is used effectively anywhere on the West Coast.
Well, given that the title of your post was “Should I rent or should I buy,” you will have to excuse me for taking the discussion in that direction! 😉
I find it difficult to believe that rent vs buy scenarios are difficult to be “used effectively” in a West Coast market. They should be able to used in any market that supports both renters and buyers/owners. The fact that rents have deviated so tremendously from mortgage payments is problematic. It speaks of a lack of fundamentals supporting the purchase price of a property. Does it not?
Like I said earlier, room for an ownership premium exists and to make it more explicit, such a premium will be directly correlated to demand. If more people want to live in a given area and there is a finite amount of housing, the price to own will go up. Rental markets are also subject to supply/demand issues, but are also more tightly linked to income levels. This is because renters (due to their transient nature) are much more likely to do things such as find additional roommates, move in with friends, etc should prices become a burden. Renters also can not rely on financing and debt to the same extent that homeowners can.
And taxes should affect one’s decision to buy (or not buy). Should it be the only reason? No. Should it be a reason? Most certainly! Not considering tax issues would be extremely foolish. Why do you not bring it up with your clients? You don’t think they want to know that under the terms of one loan a home might cost them 500k in total whereas with a different loan it might only cost them 400k? Maybe this isn’t the job of an agent, I don’t know.
As to your point about “no one size fits all in real estate”: When did I ever imply this? I certainly never said it. Properties are different, people are different, needs are different, and so on and so on. All of this is true. But holding this out as some short of shield against rigorous contemplation of one’s choices is terrible.
Flopfolder,
Truth is rents being so low makes less sense than purchase prices being high. Why does it only cost $100 more a month to rent a place today, than I paid in 1979? Clearly incomes have increased enough for that not to be so. Why can someone rent a house around the corner from me for $1,200 a month in a house that would cost at least $650,000 or more to purchase?
Maybe the question isn’t why are house prices so high, but why are rent prices so low?
Hey, I like my slogan “no one size fits all real estate”. I wasn’t suggesting you implied it, I am suggesting the rent vs. buy tables imply it. Personally I think rent vs. buy tables were made up by some agent trying to convince people to buy instead of rent. I don’t do that. People come to me when they want to buy something and we take it from there. I don’t try to convince them that they should, nor do I suggest that renting is not better for some people.
The best buy vs. rent scenarios I’ve seen this year have been a few smart cookies who bought townhomes, and then rented out 2 of the 3 bedrooms to their friends to help defray the cost of the mortgage. They were clearly better off buying, and got the appreciation and the tax write off while their friends paid rent to them. They did very well indeed.
“Maybe the question isn’t why are house prices so high, but why are rent prices so low?”
I’ll take a stab at that. Becuase a credit bubble has turned more and more renters into buyers. The effect of this is that demand for rentals stagnates and demand for houses goes through the roof.
I think when credit tightens in the near future, rents will go up. At some point, cost of renting and cost of buying will meet in the middle, with reasonable ownership premium of around 1.2 to 1.3.
I am currently renting a $500K house for $850. Total cost of my old $400K townhome was $1700 month. For me, the choice was clear and I have enjoyed socking away the savings for a ‘rainy day’ AKA buyer’s market.
Wreckingbull,
Interesting. Since I absolutely agree that there has been a credit bubble, then I have to agree that there is a Housing Bubble.
So perhaps the definition of the Housing Bubble is the answer to these questions. Where would housing prices be, if lending standards had been more conservative? Where would housing prices be if there had been no lender fraud; investors claiming the loan was an “owner occupied” vs. an investment purchase? Where would the market be if there were no, or at least fewer, “stated income” loans? Where would the market be if there hadn’t been so many flippers invading the market, skewing the numbers and pushing prices above where they would be, if you simply had owner occupied sellers and owner occupied buyers in the marketplace?
By definition, a bubble is full of air. Over the top leniency in lending standards and fraudulent lending practices equals “the air” in the bubble.
Thanks Wreckingbull. That’s a concept I can get my brain around. Tightening lending and appraisal standards would squeeze the air out of that bubble. If and how that is done, will make the difference between a pop and slow leak hissssss.
Love the buy vs. rent controversy 🙂 I think a huge factor missing here is the social benefits of owning. I happen to believe in the whole “it changes your life for the better and makes you more responsible and you care for the neighborhood more and blahh, blahh, blahh”. Plus, here in Chicago, you’re likely to get kicked out of your rental for a condo conversion sooner or later.
Crappy landlords, bad windows and doors, no parking, loud neighbors, “quirks”… these are typical for normal rents in the city. To rent something quality, you’ll still pay a little less than owning a more modest in size, but comfortable and high quality condo/home. But the margin really closes up and you’re paying someone else rather than yourself and a bit at their mercy. Plus, any improvements benefit the owner.
So, in close, one must not forget the social and psychological factors in owning. I think it’s been a boon to my wife and me (and Mini-Me on the way). Our neighbors are high quality and more stable and make having a small family situation in the condo building a more enjoyable prospect.
>s to 1997 prices…I sure hope you are right as to Southern Calornia. I’d love to buy a home on the beach at 1997 prices for weekend getaways from this rain! Is it ever going to stop?
Its’ funny how you read my comments and infer that I said we’d revert to 1997 prices. Do you miss these obvious things on purpose?
Synthetik,
I deleted the rest of your comment, as your are clearly spewing out garbage at this point. Synthetik, go back and read your own comment #2, and stop acting like I am pulling my facts out of thin air.
I told the girl to rent, and you are commenting as if I told her to buy. You need to take a pill.
You are history. Go back from whence you came. I do not control other people’s posts on here. But your comments are not welcome. You turn everything into your own personal message.
We DO feel sorry for you that you had to sell in 2003, and likely would have made a ton of money if you could have kept it through now. We really DO feel sorry for you. But that is no excuse for you to run around screwing with our articles, and turning the comments into your own personal rant point.
I’ve had it with you. No more comments from you on MY articles. Anyone else can treat you as they wish.
Ardell:
I read synthetics post earlier and didn’t see anything wrong with the post other than general disagreement.
Censoring and deleting posts essentially invalidates the whole blog.
You might want to check womma.org (word of mouth marketing association) for ethics on deletion of posts
Thank you, Mensa. I will.
Mensa,
I couldn’t find anything on womma.org that addresses this issue. We considered not permitting anonymous comments, but that didn’t seem appropriate. Synthetik has been warned in the past, and he is banned from my posts. So you may not find anything in his post that would lead you to understand why he was banned, as that is an ongoing issue. He has sent me personal, threatening emials and he was warned not to take every article and turn it into his personal diatribe. He stopped for awhile, but he was fairly warned, and now he is banned.
Dustin can decide whether all of his comments go straight to the spam filter. I can only delete his comments on my posts after the fact.
If you have other suggestions, I’m willing to listen. If you can point me to the section of womma.org that addresses commenters who are banned from the site, and how to best deal with that, I would very much appreciate your input and direction. I cannot even report his threats, because he does not reveal who he is. His emails come from the same anonymous “moniker”.
Mensa,
I completely understand your desire to keep us “honest” by following the proper WOM ethics and yet we need to have a way to deal with trolls. Synthetic has no desire to add any value to the conversation and consistently lies in his comments and has sent threatening emails to both Ardell and me in the past. I can honestly say that we never delete or edit comments because we disagree with someone’s opinion. Someone really has to be a troll in order to get Ardell mad! 🙂
For better or worse, we blog because we enjoy it. Synthetic’s purpose is to take away the enjoyment we get out of blogging and to intimidate others so that they do not feel comfortable contributing. I’m with Ardell that unless he is willing to stay on topic (and develop the ability to convey a logical thought), then he is not welcome here.
Ardell & Dustin,
I think you’re being deliberately thick regarding Synthetic’s “1997” statement. He doesn’t say prices will go back to 1997 prices. He says a fair price today is to start at 1997 prices and ADD 3.5% per year to arrive at today’s price.
I found his posts on this particular thread to be logical and on-topic. If you can’t handle a dissenting opinion, maybe you should quit blogging.
bobbyj, I think you could use the Seattle Bubble’s rules as our rule of thumb. This one in particular:
“No intentional antagonism.”
A little antagonism is OK, but not too much
Wow, you are totally correct. Ardells comments on the Seattle bubble aren’t trollish at all though…
I’m not quite sure what “trollish” means, but I agree. I thought it would be useful to my clients for me to “track” potential bubble areas and market segments. I can’t do that with agents, because they don’t want to talk about bubbles. I thought I could help provide statistics to Seattle Bubble, using my agent available resources, and we could sort out bubble areas from non-bubble areas. But that didn’t work out well.
I learned a lot there, but I’ve left because I am as much a disruptive force there, as they are here. Shame…just is. I “banned myself” from their blog for the same reason. Dustin is correct. “For better or worse, we blog because we enjoy it…” They don’t “enjoy” me there, we don’t “enjoy” them here. Tough topic to “have fun” with.