The assumption that buying is preferable to renting is so ingrained in our national real estate psyche, that to suggest otherwise could result in someone questioning your financial, if not actual, sanity. The New York Times did some serious nationwide number crunching, however, and is concluding that renters fared better than buyers over the last two years. The turnabout is the result of buyers facing higher monthly costs than renters, while losing money on their investments as home prices declined. The paper then goes on to discuss the necessary conditions for perceived order in the universe to return, when buying is again the smart move.
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.
“House prices have to fall more before housing becomes a clear buy again,” says Mark Zandi, chief economist of Moody’s Economy.com, a research company that helped conduct the analysis. “These markets aren’t as overvalued as they were a year ago or two years ago, but they’re still unfriendly. And that’s one of the reasons the market is still soft — people realize it’s not a bargain.”
In one of those clearcut occasions when it is better to read the online version of the Times rather than the print version, there is this great interactive calculator that graphically shows the trade-offs between renting and buying based on a number of criteria the reader can adjust. The print version has just one static example that it snapshots at three different points in time.
On his finance and economics blog, Felix Salmon admires the Times' effort in constructing its model, but also looks at some of the underlying assumptions involved and questions the paper's points of emphasis.
To read the article, the main variable in determining whether or not you should rent or buy is the amount by which property prices are going to rise in future. Most of the calculations hold everything else constant, and then wonder how many years it will take you to break even given different rates of property-price increase.
But spend a bit of time fiddling around with the calculator, and you realize it's not nearly as simple as that. For instance, the NYT's calculations have a default rate of rent increase of just 4% per year. That seems low to me, given the fact that rent increases haven't remotely kept up with price increases in most of the country. If the two come closer into line with each other, some of that might come from prices going down – but a large chunk of it might come from rents going up. It's hard in the rent vs buy calculator to account for the risk that your rent will suddenly go up by 15% next year.
Both pieces are interesting reading and practically required, since there are few things New Yorkers like to talk about more than real estate. You'll probably be quizzed on it this weekend!