rent vs buy: a different comparison

[acordeon]

As a person of modest means wanting to buy his first home (in Bellingham) before too long, I have found rent vs buy comparisons like Tim's (http://seattlebubble.com/blog/2008/12/0 ... cial-move/) and this from the NYtimes (http://www.nytimes.com/2007/04/10/busin ... APHIC.html) very helpful. However, they don't really ask the right question for me. They all ask: what's the financial difference between renting for x years vs. buying a house now, keeping for those same x years, and then selling it.

That's not what I want to know, because I'm not looking to buy primarily as an investment. I hope to live in the place for a good while. So I want to know: if the market continues to drop, which I'm convinced it will, how much money will I lose if I buy now, compared to waiting a year, or 2 years.

Here's what I came up with, a comparison between buying a house now, and waiting a year and buying the "same" house. I'd appreciate it if you guys would put this through the wringer, poke holes in it, tell me where I've got this wrong:

http://spreadsheets.google.com/ccc?key= ... wqBiiGPqbw

A few notes:

I of course had to make some assumptions. Here I'm assuming:
* the market will drop 15% in the next year. Maybe gloomy, but not out of the question.
* that I can get the "same" house now vs in 1 year. Of course different houses will be on the market, but let's just play along with that one.
* that mortgage interest rates will be the same in a year as they are now. Unlikely, but I honestly don't know if they're more likely to be higher or lower, so let's just call that a wash.
* that closing costs will be more or less the same. I know this won't be literally true, but I decided to ignore what will probably be a small diff. We'll put 20% down and won't need PMI.
* that congress will come up with something to replace the current tax deduction for first time homebuyers which expires this summer (http://www.irs.gov/newsroom/article/0,, ... 31,00.html). I suspect they may come up with something even better, but let's call this a wash too.
* that if we don't buy, we will rent a relatively nice house (which we already do), rather than save max money by renting a small apt.
* that rent on a decent house would be around $1200. Remember, this is Bham.
* that utility costs would be more or less equal in the house vs the rental. Probably not true, but we do pay most of our own utilities in our rental now.
* that maintenance costs on the house would be the same whether I buy it now or in a year. Even though the rule of thumb is a % of purch price, and the price will change, it's still the same house.
* that given the current climate, I should only expect a 2%, not 3% or higher, return on money invested for a short term like a year. This would probably be a combo of bonds, CD's, and regular savings deposits.
* that we're not willing to wait more than a year or so, no matter the market conditions (unless things get REALLY bad). This is just due to where we're at in our lives. It's not all about money.

The top section shows the costs for buying a $285k house now. The box in green I got by plugging numbers into Tim's spreadsheet.
The bottom section shows the costs for waiting a year, then buying an equivalent house.

My conclusions:
* I save almost $16k the first year by renting (diff in down payments, investment interest, year 1 maintenance, minus year 1 tax break)
* Mortgage payments will eventually be almost $200 less per mo, but that will be partially offset by some missed tax savings for the first few years

What do you think?

[WestSideBilly]

I think 15% decline is a bit optimistic on your behalf. I also think getting a 5% loan in a year might be a bit less likely than you're believing.

Assuming you have $57k available as a downpayment, I used the following:

57k down, 228k loan, 5%, $1224

vs

58k down*, 198.5k loan**, variable rates.

A 6.25% rate is $1222 P&I. Operating on that 10% decline you have 1.25% increase in loan rate before you "lose". This seems to be a pretty healthy margin.

However, most of your "savings" are in the distant future, and based on assumptions of declining prices (likely, but to what degree is hard to tell) and stable rates (unlikely, IMO - and not likely to go much lower), and NOT having a cheaper rent. I.E. my rental house is about $2300/mo total costs vs $3500 to buy/maintain/insure it myself - big savings in the current time frame. Since your rental is nearly as much as P&I will be, there's not a huge benefit there. And since you're planning on staying a fairly long time, the "value" of your home becomes pretty hard to forecast, as well as being somewhat irrelevant.

If I were in your shoes, and your rental agreement is flexible, I'd *begin* the buying process sooner rather than later... throw out some offers that undercut the 10-15% decline and if you get a taker, take. I'd look at it more from the perspective of which roof you want over your head and less as a profitable investment.

* 57k with one year of 2% interest
** 10% decline, 58k downpayment

[ira s]

I'm with Westside Billy on this one.
In theory, you could find a home now that you could purchase for 15% less than comparable homes. If that's the case, and you figure another 15% drop will be the bottom, and if you figure you will indeed live in he house for a good long while, then it seems to me that it's more or less a wash. Some people feel like they're not in control of their own lives unless they own a home, some people feel much more secure if they own a home...These are partly emotional decisions ...
For me, personally, it wouldn't make sense to feel better emotionally by spending double my rent on mortgage, but if it's pretty close, it can't hurt to scour the listings now to see what's out there, and take your time figuring out what you want.

[explorer]

Is this comparison somewhat similar to measuring present value to future value? That's still from an investment, not a lifestyle view.

I look at it much more simply (maybe too simplistic).

1. What are rents now for what you want/need AND can afford?

2. What are the mortgage costs (assuming 20% down) for equililent homes, now that you can afford? What is the current YOY trend?

3. As Ira said, when rents and mortages are close to each other, it could be a tipping point to buy, all other things being equal. I realize those other things are numerous.

This does not invlove calling the bottom as much as what you can actually afford.

[mukoh]

I have owned properties for over 11 years. Not a huge term. This is land, multi unit properties, and such. My partners/acquaintances, have been in multi unit, mixed use, land, duplexes, sixplexes etc., since late 70s and later. One has 8000+ apartment units up and down Western Coast, that family goes back from 1950s in real estate.
Thats background.

I have brought up before a scenario to them that a lot of people here talk about, i.e. rents are extremely close to mortgage payments on like property, and likewise median income affords a median priced home.
That has brought chuckles and to a fairly interesting opinion that long term guys have on this:

1st. Rents have never been in line or that close to make it a complete wash to own a home rather then rent or close to it. It will always cost more to own. GET USED TO IT. Have seen stats from 70s and on. Ownership is an achievement that majority of people crave for odd reasons.

2nd. This was actually proven. There is ALWAYS a large segment of the market that do not care nor pay attention to economic factors in their home buying decisions. How big that segment is, shows you the amount of sales in Dec. There is almost 1000 obliviously happy people there.

Boggles your mind, when you see 1k people jump off the fence for who knows what reason.

[acordeon]

Thanks, everyone.

Do you really think it's so unlikely that rates could stay flat or even fall? What about this plan we kept hearing about?: http://www.wbaltv.com/news/18210465/det ... l&psp=news

Besides that, and the 15% price decline, I guess no-one's found major fault with my numbers?

It does seem that rents are a little higher w/ respect to purchase prices in Bham than in Seattle. It's also true that since prices are simply lower overall, a percentage loss or gain means less in dollar terms. So I'd be more cautious if I was buying in Seattle.

I should say that I wasn't looking primarily for advice on whether or not to jump off the fence now, but it's welcome if folks want to give it.

On that note, I should fill you in that we already are looking (we started in the fall, before some of the gloomiest econ news hit and started making me skittish). We considered buying a place last month, but decided against it. The place wasn't worth the risk.

There are a few reasons why I'm considering this so carefully. One is that we anticipate a pretty tight budget in a few years when we have kids. So even $200 less in mortgage every month would help. Same with the $16k we could sock away that first yr.

Also, although we feel pretty secure in our jobs, if the recession lasts several years, you never know. So while we want to stay put for a good while, it's not out of the question we could end up having to move sooner to pursue a job. So I'm trying to find a way to feel reasonably good that we won't lose our shirts if that happens.

I understand there's no guarantees with any of this.

[sniglet]

[perfectfire]

[sniglet]

Both rates and rents will fall!

[explorer]

...and when mortgages fall to close to the CURRENT rents (which will fall from the CURRENT rates), THEN, with CURRENT income, people will buy.

That preserves mukoh's GET USED TO IT, about mortgage costs vs. rents, and makes it sustainable with current income adjusted for inflation, or not. This also assumes Getting used to it, means that other costs of living don't impact the big real estate baron's assumptions too.

[sniglet]

[Alan]

[redmondjp]

And according to the LA Times, rents are dropping in La La Land also:

[FreedomLover]

Renting and buying being equal in terms of monthly cost, I'd rent. Of course there are a lot of factors to consider. Like:

* quality of the apartment complex(air quality, proximity to high crime area)
* is it maintained or derelict
* is the landlord any good
* is washer/dryer a must in the unit

It's not all black & white like some people believe.

[garth]

Single family homes and condos are just not designed to be rental products, and being a landlord with one unit for rent is too risky and expensive for most people. Most speculators hanging on and renting are going to get hammered as they are not able to refinance at nearly the same leverage anymore.