Economics of Renting vs. Owning

<i>For a renter, their payment would remain about 85% of what a new home owner would be expected to pay, so they would pay out 85% of 30% for the duration, or an average of 25.5% of their salary.</i>

Look. If you assume that initial rent is 85% of the initial mortgage payment, of course buying is cheaper than renting in the long run. I would jump at the chance to pay a 15% premium to own a house instead of renting. No matter how you model it, that is a good deal.

The reason this thread exists is because those initial conditions are a fantasy for most of the United States today. My rent is <i>at most</i> 45% of the mortgage payment I would pay on an equivalent house. A great deal of the housing stock in the United States is valued at levels where buying will never pay off relative to renting.

Platitudes and folk wisdom about how buying was a great deal 10 or 20 years ago are less than useless when we are discussing the question of whether to buy or rent a house <i>today</i>.

Finally, if I could buy a primary residence in Calgary, I would, in an instant. Unfortunately the 1700 mile commute is a deal breaker.

Martin
 
Very good points. I think the key is that everyones situation is different and for many, at the present time, it is better to rent than own. I personally would prefer to be a buyer, but I think this is good time to sit on the sidelines. Another factor I think some may be missing is that by buying in a hot market you have the risk of not only no appreciation, but NEGATIVE appreciation.
 
Quote from Sparohok:

[...]

Platitudes and folk wisdom about how buying was a great deal 10 or 20 years ago are less than useless when we are discussing the question of whether to buy or rent a house <i>today</i>.[...]
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My comments earlier were exactly to address this. The fact that right now in many major markets, it makes more sense to rent. It is clear now that everyone should have bought and built equity into their home 2 or 3 yrs ago. The environment is not the same any more. I know this was probably said in 2003, but it is clear that the interest rate environment and the ungodly appreciation over the last 3 yrs put things up there with Yahoo in 2000, as others have pointed out.

For the market I'm in, I have run the spread numbers on townhouses, condos, SFH's and even land to build on. It is loud and clear that unless something drastic happens with job growth, earnings and interest rates, anyone buying today would be taking an enormous risk and tying up cash in an asset that has a better probability of stagnating or depreciating (I bet on depreciation given the amount of supply that is in development and the amount available from investors and prior owners looking to cash out and move to cooler markets).

Looking at the economics of renting vs. owning using the numbers from 2 or 10 yrs ago is like saying "see.... you should have bought Gold in the mid 200's and HANS at the IPO."

My 5 cents worth (more inflation since my last post) :D
 
Good enough.

I read elsewhere that you were paying 2300$/month in rent. I hope that you are putting the 65% difference aside over the long term so that it can garner the 8% average annual appreciation as per your spreadsheet. Otherwise your numbers will not add up and all it will mean is that you are flushing your money renting too much property when you sould be looking at starter homes instead.

So you save 3000$/month after tax on top of 15% of gross for your retirement and you will do this without exception for at leat 15 to 20 years minimum.

Plus you save some money in case you want to fund a trading account, buy a car, go on vacation, or maybe for an emergency or 2.

If you can do this, you are trully an exceptional saver and will have way more money than you can handle over your lifetime. Pretty unrealistic for most people but I know you are special.


Quote from Sparohok:



Look. If you assume that initial rent is 85% of the initial mortgage payment, of course buying is cheaper than renting in the long run. I would jump at the chance to pay a 15% premium to own a house instead of renting. No matter how you model it, that is a good deal.

The reason this thread exists is because those initial conditions are a fantasy for most of the United States today. My rent is <i>at most</i> 45% of the mortgage payment I would pay on an equivalent house. A great deal of the housing stock in the United States is valued at levels where buying will never pay off relative to renting.

Platitudes and folk wisdom about how buying was a great deal 10 or 20 years ago are less than useless when we are discussing the question of whether to buy or rent a house <i>today</i>.

Finally, if I could buy a primary residence in Calgary, I would, in an instant. Unfortunately the 1700 mile commute is a deal breaker.

Martin
More...
 
Quote from jmccain:

Otherwise your numbers will not add up and all it will mean is that you are flushing your money renting too much property when you sould be looking at starter homes instead.
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First of all, that wasn't my spreadsheet that claimed 8% returns. I'm pretty sure I did post a spreadsheet here many moons ago in another thread. My spreadsheet assumes that all forms of savings earn the risk free rate - home equity, investment, and rent and wage increases. A highly conservative set of assumptions.

Sadly, this <i>is</i> a starter home. You don't know the California property market. On the other hand, you're right, I am a decent saver. I could just about buy this house with cash. I'd rather rent.

I don't think saving is necessary to make renting a better choice than owning, though. As long as you are aware of the opportunity cost, money spent and money saved are both making your life better. If I want to take a year off and travel the world while I am still young, I'm not going to scotch the idea just because that money could be earning 8 or 10% instead. I see so many of my friends who are "house poor" because they bought in an inflated market. They may, or may not, become wealthy in their old age because of their home equity. But right now they are poor. That's no fun.

What I find really pitiful is people who believe they can't save unless they have a mortgage forcing them to save. While that may be true of many Americans (or Canadians), it is a sad comment on the state of our society.

Martin
 
Quote from Sparohok:

<i>For a renter, their payment would remain about 85% of what a new home owner would be expected to pay, so they would pay out 85% of 30% for the duration, or an average of 25.5% of their salary.</i>

Look. If you assume that initial rent is 85% of the initial mortgage payment, of course buying is cheaper than renting in the long run. I would jump at the chance to pay a 15% premium to own a house instead of renting. No matter how you model it, that is a good deal.

The reason this thread exists is because those initial conditions are a fantasy for most of the United States today. My rent is <i>at most</i> 45% of the mortgage payment I would pay on an equivalent house. A great deal of the housing stock in the United States is valued at levels where buying will never pay off relative to renting.

Platitudes and folk wisdom about how buying was a great deal 10 or 20 years ago are less than useless when we are discussing the question of whether to buy or rent a house <i>today</i>.

Martin
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Ok, you have me confused. We are talking about the long-term, right? Not just today? Sure, there are going to be periods of time where the rents in areas like California or on the beach are half of the payment. But those are times right after a run-up in price. See...the value of the home had to double prior to your 45%-thing happening, and any homeowner in the same area who had locked in a mortgage would have payments comparable to what you are paying now but they'd have all that equity too. If you can pick an "extreme" point in time to evaluate the rent vs. buy decision, then I guess I can too. A few years ago in my neck of the woods, you could buy a place and rent it for more than your fixed payment.

But if we are discussing all points in time and all places...the long run...then the 85% rule is pretty good. Most landlords try for 100% on new purchases. Even in California.

Its not fair to run a spreadsheet calculation for renting vs. owning, and then using as an example, a location and time where buyers grossly overpaid. Its also unfair to expect that condition to stay the same way over time because my tenants rents will always go up faster than my payments even when I do overpay. I'd be real curious to know what your landlord is actually paying for that property monthly that you're renting. A Landlord who knows what he's doing almost always pays less than his tenants. If you'd have bought the house you're living in at the same time, on the same terms, you'd be paying less too.

SM

SM
 
Quote from Smart Money:

Its not fair to run a spreadsheet calculation for renting vs. owning, and then using as an example, a location and time where buyers grossly overpaid.
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That's exactly my point, that in much of the US today, buyers are grossly overpaying. If you agree with that, I don't think we have anything to disagree about.

I'll happily stipulate that at almost all places and times in postwar America, buying real estate for the long term has been financially advantageous compared to renting. The whole point of this thread is that there are exceptions to the rule, including many areas of the United States today.

Martin
 
Here in Australia an OECD report out late last year found that our housing stock is overvalued by at least 52%. Australians have always been speculators on the property market, the many and varied land booms we have had here since and even before Federation are always bubbles. My house cost me A$12,000 in 1987 when cash rates set by our Reserve Bank was around 18%.
I bought the property for cash it is now worth $200,000 at least and it is 50 miles away North-West of Melbourne in the mountains!
I rent because the A$400 a week I pay in rent here wouldn't even cover the cost of fuel commuting to and from Melbourne.
In my SPECIFIC case, at this point in time, renting makes more sense than even living in my own house!
Real Estate agents here in Australia are almost completely unregulated. Easy access to money from banks and the general stupidity of the local populace allowing to get themselves signed up for 35 year mortgages and paying A$300,000 for ex-housing commission concrete bunkers than could have been bought for A$30,000 some 15 years ago.
 
A lot of people near Sillicon Valley bought homes far away to commute to their work. Gas prices force them to rethink about it. Many move into mobile homes closer to work.
 
I have a Russian stockbroker friend here who used to work in Silicon Valley (he has moved to Melbourne Australia about 6 months ago) who said the same thing!
In my case, even before the price of petrol skyrocketed it was still plain and simple good economic sense to rent in the city rather than wake up at some ungodly hour drive (a hassle!) park for A$20+ a day. Renting has its benefits, its a lifestyle choice.
Real Estate Agents are in many cases like "gold bulls" who constantly 'bleet' about gold 'should be' at thousands of dollars an ounce, they rely that the popluation is to some degree ill-informed.
 
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