Economics of Renting vs. Owning

MoralHazard · May 17, 2006

Quote from Sparohok:

<i>In ownership you are building equity while you're residing. This must be factored into the models.</i>

Home equity is a form of savings. Renters also save, by investing the money they don't have to pay in interest. If you model home equity, you must also model opportunity costs.

Martin

In the long run - because US homeowners are not taxed on imputed rental income - renters/the economy are subsidizing owners.

Currently, at least in some markets, the aggregate landlord is perhaps unrealistic in his pro forma and subsidizing the renter. So what you say may well be true where you live, in the short run... [edit: and I now see you say all this in an earlier post]

Covertibility · May 17, 2006

When asked by Ron Isana on CNBC whether he owned or rented his home, Robert Shiller said he owned both. Likewise I'd bet others who say housing is in a bubble own their own homes too and aren't selling. Given the belief that housing is going to crash, why would these people still opt to own rather than cash out?

If you watch HGTV, a show called "House Hunters" from time to time has single people buying homes. There are numerous articles about people buying homes and remarking about the high cost and what they'll do to make ends meet, but still feel happy at the end of the day that they live in a house.

I wonder why people want to live in a house as opposed to a cardboard box(apartment).

canyonman00 · May 17, 2006

The flaw that I find in your model has to do some minor equity depreciation logic that's been overlooked. In many African American communities across the country your logic of better to own does not hold up.

Then when you add in the reality of things like refinancing over the life of the property (for upkeep, paying property taxes, and/or to make ends meet in many cases), it is further out there. There are a lot of folks who took out that second to put the kid into college. Equity hit again!

It also does not account for those who have overbought. You speak of the ideal situations in your model. Even in the minor appreciation play. I'd like you to include some of the real world in those figures.

Quote from The Kin2:

I built a little model which analyzes renting vs. owning from different investment standpoint.

All the variable from property taxes to inflation, utilities to discount rate, mortgage interest tax savings to possible depreciation, and everything inbetween are included.

The results are very interesting. Even as a huge beleiver in home ownership, the results caught me by suprise.

When it comes to the renting vs. home ownership debate, there is no question which one is better. Even with minor depreciation, a home owner is still going to come up with a positive npv in the long run.

Arnie · May 17, 2006

Quote from andrasnm:

Most people, including many on this board cannot make 10-percent a year in their investment/trading account, on the long run. Fact of life. For those people real estate is REAL (no pun intended) and the only investment they will ever make and not lose their ass!
The greatest kicker is for owner/builders (must live in the house for as little) and rehabbers upon selling the home their gains are tax protected - try that with your stock account from interactive brokers!
This is why most wealth in the USA and for sure in CA is from Real Estate and not from market speculation. Just my 2 cents....

You make a good point. Along that line of reasoning, I remember many years ago some economist was making the point that one reason RE was such a reliable investment was that it forced you to be long. RE is really very illiquid compared to stocks, bonds and other fungible investments. If it were as easy to buy/sell as other investments, I would imagine the returns would be much less.

Mvic · May 18, 2006

Have to agree with Martin. I have been renting a place here in Boston for $6K a month for the last year( was worth $3M when I started probably closer to $2.5 now as inventory above $1.7 million has increased 50% but sales have slowed and time to clear inventory is up from 4 months year ago to 15 months according to mailer I got few days ago). Landlord pays for extensive landscaping and snow removal. I have to make a decsion to move or not in the next few months and I have opportunity to lock in rent for 4 years at $7.5K.

Only thing that is really giving me pause are the new housing futures that are set to debut on the 22nd, one of them will be Boston specific and I could hedge any RE equity exposure with that.

crackedback · May 18, 2006

Quote from FastFred:

In ownership you are building equity while you're residing. This must be factored into the models.

Another major flaw...

Are you building equity if the home takes a 20% dive in value from the purchase price? In a flat or up market, yes.

There are a bunch of homes in my neighborhood that are selling for MUCH less now than they were last year... Hmmmmmmm.

Sparohok · May 18, 2006

Quote from Mvic:

Only thing that is really giving me pause are the new housing futures that are set to debut on the 22nd, one of them will be Boston specific and I could hedge any RE equity exposure with that.

Hedging with those instruments will be VERY expensive. You can expect mean reversion to be baked into the futures prices. Since there's no liquid spot market, it would be next to impossible to make a market in these futures.

Who do you expect to take the other side of your hedge?

Martin

jmccain · May 18, 2006

It all depends when you bought it. If it's gone up 100% the 3 years previous then I can live with a 20% dip. I know in Florida right now, it's a pretty rough market and there is a lot of inventory. But if you owned the house for 2y+ you're still in the black. Plus you're living in paradise so I am not going to cry for you!

The great thing about a flat or downard market is that all the chicken little renters are fighting each other to pay off the mortgage on my investment properties. This lowers vacancies and allows increases in rents. When a property brings in higher rents, it is worth more.

When the real estate market is too hot, it's hard to find good renters because they all buy. This has been a problem in the previous years but as expected it's getting better.

Quote from crackedback:

Another major flaw...

Are you building equity if the home takes a 20% dive in value from the purchase price? In a flat or up market, yes.

There are a bunch of homes in my neighborhood that are selling for MUCH less now than they were last year... Hmmmmmmm.

Mvic · May 18, 2006

Chicken little renters, I like that lol. A friend of ours bought a place 3 years ago and did it up then found out they needed to move. Put the place on the market last summer for 2.6, sold for 1.8 and they lost over 400K. Sometimes the sky really is falling :-)

Another case we know of had property on market for 1.4 and got an offer for 1.1 spring of last year, didn't take it. Now the house is on the market for 975K and has been for last 7 months with no offers, she is thinking about reducing again.

Dozens of home in the 1.2-2 range sitting empty on the market for more than a year, new contruction and existing. How long can that continue with supply increasing at an accelerating pace?

Renters for the higher end properties are still few and far between even at the current low prices.

$1M new construction condo's here in Boston have already dropped asking price by 15-20%. Huge supply oming on line in the next few years that will dwarf what has come online last 4 years. Not sure who will be buying them all and if it is the suburban emptynesters who are trying to go rban what will happen to prices in the suburbs, what will happpen when all those who have opted to rely on downsizing and cashing out their home equity for retirement see prices falling and thier retirement threatened? The housing crash will happen, demographics alsmot assure it, but as with anything that has demographiocs as a prime mover it will happen gradually.

Despite all that if I was going to stay put for the next 20 years I would probably buy now regardless but as i know I will be moving within 7 years I would rather rent than risk losing an arm and maybe a leg, after all if i bought i would put significant money in to the property to customize it for our family, not doing that would not be much different than renting imo.

Yes I want to see how the futures trade. As far as who will take the otherside of the trade i don't think there will be too many problems there as there are plenty of funds that will be looking to get some more RE exposure without having to take physical possesion and all that entails.

der_kommissar · May 18, 2006

Quote from Mvic:

Chicken little renters, I like that lol. A friend of ours bought a place 3 years ago and did it up then found out they needed to move. Put the place on the market last summer for 2.6, sold for 1.8 and they lost over 400K. Sometimes the sky really is falling

Another case we know of had property on market for 1.4 and got an offer for 1.1 spring of last year, didn't take it. Now the house is on the market for 975K and has been for last 7 months with no offers, she is thinking about reducing again.

Dozens of home in the 1.2-2 range sitting empty on the market for more than a year, new contruction and existing. How long can that continue with supply increasing at an accelerating pace?

Renters for the higher end properties are still few and far between even at the current low prices.

$1M new construction condo's here in Boston have already dropped asking price by 15-20%. Huge supply oming on line in the next few years that will dwarf what has come online last 4 years. Not sure who will be buying them all and if it is the suburban emptynesters who are trying to go rban what will happen to prices in the suburbs, what will happpen when all those who have opted to rely on downsizing and cashing out their home equity for retirement see prices falling and thier retirement threatened? The housing crash will happen, demographics alsmot assure it, but as with anything that has demographiocs as a prime mover it will happen gradually.

Despite all that if I was going to stay put for the next 20 years I would probably buy now regardless but as i know I will be moving within 7 years I would rather rent than risk losing an arm and maybe a leg, after all if i bought i would put significant money in to the property to customize it for our family, not doing that would not be much different than renting imo.

Yes I want to see how the futures trade. As far as who will take the otherside of the trade i don't think there will be too many problems there as there are plenty of funds that will be looking to get some more RE exposure without having to take physical possesion and all that entails.

Good arguments man. If a guy doesnt want to spend the next 20-30 years in one place, MVIC's method aint too bad. The real estate bulls might be right over the TRUE long haul, but those nasty fluctuations in the interim make MVIC's approach alot more appealing.