Better to Rent Than Buy in Brooklyn Now?

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The rent vs. buy equation has changed again in places like Brooklyn, where home prices are now so high it might make more sense to rent, according to a story in The New York Times. In fact, the market turnaround may show we’re in a bubble that is going to crash soon, the story said:

An analysis by The New York Times finds that in the country’s most expensive places, including New York, the San Francisco Bay Area and Los Angeles, buying a home again looks like a perilous investment, based on the relationship between their prices and rents or incomes. And in a longer list of areas, including Boston, Miami and Washington, prices have risen enough that buying is no longer the bargain it looked to be a few years ago.

…But across much of California and the Northeast, prices are now high enough that the costs of owning a home – property taxes, repairs, fees to real-estate agents and mortgage interest – may outweigh the financial benefits, including the tax break.

It is the latest change in a yo-yo pattern over the past decade. From 2004 to 2006, the math overwhelmingly favored renting rather than buying across most of the country, even as many Americans mistakenly decided that home prices could never fall. From 2009 to 2011, buying was an extraordinary deal in most of the country. Even the markets that have experienced huge price increases are far from the clear-cut bubble conditions of the mid-2000s, but they’re inching closer with every bidding war.

This viewpoint comes as a surprise to us: Even as housing prices in Brooklyn have risen steeply in the last six months or so, so have rents — or so it seems to us.

But an analyst at Moody’s sees it differently: “A lot of these coastal markets look overvalued compared to rents. In these markets, it seems generally more attractive to rent than to buy, even as the national market is broadly well balanced.”

If you are considering a house that costs $500,000, it might make more sense to rent if a similar place is available for $1,956 a month or less, said the Times. Do you agree?

Rent or Buy? The Math Is Changing in the Northeast and Coastal California [NY Times]

41 Comment

  • Well,
    Say you have $500k cash. You can choose to use it to buy an apartment, or keep invest the money.
    At 4% average interest rate, which is conservative, your invested money will be $1.1 million after 20 years.
    If you invest your money on the s&p 500, you could get $5.7 million (13% annual return is the 25 years average)
    And you will not have to spend the money for insurance, maintenance of the place, mortgage cost, etc…
    So everything depend how much you can sell your house for in 20 years…

    • Your analysis is fraught with misinformation, not the least being the long term annual return of the S&P 500. Your analysis of bond returns takes in no accounting for rising rates and DRAMATIC loss of principal.

      • I am just trying to explain how the Times do their calculation.
        I am myself an owner but still like to look at all point if views.

        • i didnt know those number were from the Times. they are very wrong, especially the S&P l.t. return number

          • i just mean this is the way the Times is balancing buying vs renting. Not sure what number they use.
            What annualized rate would you think the s&p 500 did return in the past 25 years?

          • 11% but much less so for 5, 10 & 15 years. Most “aggressive” pension assumptions use 7% but anyonw who has worked in the investment business knows that number too is aggressive. I would not be comfortable withdrawing more than 4% of capital (above dividend income) from an IRA longer term as an assumption of what the longer term gains in the market will be.

        • Transworld is right, real estate has never been a good long term investment. it is about putting a roof over your head, and can provide income if you rent out some rooms. Investing your money is the better bet for growing your money.

    • This invest versus buy a home analysis also does not take into account risk tolerance and what you would ACTUALLY do if you had 500k in cash – would you really invest all of your 500k in the S&P 500? If that’s not your actual next available/realistic alternative or opportunity cost, the analysis doesn’t matter.

      • Yes I am open to anyone who can do a better calculation.
        Just was thinking that the blog post author seemed surprised anyone could think real estate was not the best investment you could make.
        It’s worth to note that during certain periods, it’s better to save rather than buy, even so you want to buy at one point.
        Right now renting and waiting for the next slump may be better, if you keep your money at work.

        • Agreed. I think its almost like calculating taxes, it’s not a one-size fits all type of analysis. A lot of non-quantifiable aspects go into purchasing versus renting.

      • The article does not discuss investment gains at all (S&P or treasury bonds or anything). The calculator provides a place to enter it, but the baseline provided is 4% with no explanation of how that is achieved.

        The calculator also is extremely confusing — it attempts to factor in your tax rate to determine the value of the mortgage tax deduction, but appears to ask for your marginal tax rate (i.e., the tax on the highest bracket of your income). If you hover over the information icon, it appears to be actually asking for your effective tax rate — which makes more sense.

        • Yes, you have to put yourself the rate of return, depending of what you are investing in.

        • The value of the tax deduction depends on your marginal (total fed, state & local) tax rate. The tax you’d save by deducting mortgage interest and property tax, vs. not having the deduction and paying your marginal rate (not your effective rate) on that income.

          It is confusing (a mistake by nyt) to have the help you get when you hover refer to effective tax rate.

  • Short term thinking is never the correct way to look at the longer term. Eben using their range of 2004-2011, that’s only 7 years. yes, that is longer than the average homeowner stays in one house but there are too many variables at play in this analysis to draw a conclusion. In the long run, owning will always be better especially after you pay off your mortgage (presuming you dont keep refinancing and dipping into the equity when ot develops). think of the ability to eventually just have to pay youre RE taxes, utilities and insurance. yes, there will be long term maintenance as well but a properly maintained home should never present any surprises. Even coops and condos can be rewarding long twrm investments and, at least in NYC, always have been.

  • dibs – People really move that often? Is that a fairly recent trend?

  • Seems like it was talking most about houses. I re-ran the numbers for the co-op I just bought this year, and I’m still coming out ahead. Rents in Clinton Hill are still higher than purchase prices. However, I can believe that a $500,000 home in the suburbs, with requisite NJ or Nassau property taxes, might end up looking like a bad deal if there’s a price correction.

  • Right well first it is extremely difficult to speculate on bubbles in any market and nearly impossible to forecast “crashes”.

    Here’s my sophistry. The world over is moving into urban zones. In the US this is also true. However even among urban zones there are clear winners (N.E. corridor) and losers (Rust Belt, some CA cities, etc.). Of the clear winners only a few have healthy and significant public resources (e.g. access to potable water, public transportation). And of those select few, only one draws a good deal of sustainable investment from International sources (e.g. major coastal cities but to the exclusion of Brooklyn). And I think this is an important point, b/c it is only very recently a viable investment option for international dollars — as if it were a new coastal city. Not only that — but it will both build and take market share with/from Manhattan.

    So in the short run, with all the development that will occur under the de Blasio regime, yes there may be some growing pains that come in the form of correction(s) — not a “crash” save for a black swan event (e.g. massive tidal wave). Yet, I think the mid-term to long-term looks pretty damn good.

    I say, “Buy” if you can.

  • “If you are considering a house that costs $500,000, it might make more sense to rent if a similar place is available for $1,956 a month or less, said the Times.”

    I’m really curious as to where one might find a similar ($500k) place available for 1,956 OR LESS. That’s insane. Try searching for under $2000 rentals and see what you find. I’d really like to see the Times’ data set.

  • Rent & high income taxes while investing the down payment and closing cost cash + paying rent and brokers fees and moving costs every couple of years, because in New York, unless you have a rent stabilized apartment….you will be moving every couple of years! Versus…Buying? Long term low interest rates, housing cost increases are under your control, owners get income tax deductions ( the only tax deductions for normal working people) and if you do choose ( I stress you choose) to move every couple of years, any profit you make on your home is TAX FREE. ( up to $250,000 as a single $500,000 as a couple)
    A House in Fort Greene 25 years ago ( 4 sty 2 fam Carlton between Lafayette & Greene $300,000 today $3,000,000) with many tax deductions & rent increases from your tenant along the way.
    The New York market cannot be compared to the National Market. There is always a back up rental market (in New York) for when the Banks go out of the mortgage market and you cannot sell for a couple of years! ie: 2009-2012 and it always comes back stronger each time.
    This is not a bubble, the Banks are only just getting back in the mortgage market….as they loosen the reigns the New York market still has a way to go…before the Feds put the breaks on again…and then you rent for awhile and rents go even higher. The cycle just keeps going and going….play the game right and you make a fortune…. don’t buy and be whiner….. listen to all the people whining now….”I could have bought this five years ago for 750…now its 2.5 mill!!”
    Buying in New York will always trump renting a home.

  • These types of stories pop up every few weeks, same old, same old. The cynic in me thinks it’s just propaganda to make us peasants feel happy about our lot in life, and to keep us from thinking about how low our salaries are vs. the cost of owning property. The bottom line, that none of these articles seem to take into account, is that money paid in rent is money spent, while money paid into a mortgage is money kept. It’s true, you could get a better return on your money (perhaps) if you invested in the stock market, but that’s really got very little to do with the rent vs ownership debate.

    • This comment resonates with me in the broad sense. But my unique situation, where I own an apt but will soon need to upsize, is a little different, in that unless things change, it seems to make most sense to hold onto what I own, rent it out, and rent a larger place for my family.

  • Easy to screw up the analysis. A home is a place to live and an investment choice. there are life issues and there are investment issues.

    We have a 2-fam S. Slope frame. Our unit is about 2200 sf. We have a 200 sf deck, and a front and back garden. We have a mortgagte, insurance, taxes, repair costs, etc. and we have retnal income. There is no way we could rent what we currently own for anything close to our monthly carrying costs. And we bought in early 2004, not the 1980s.

    But we also borrowed a lot and dumped a shitload into renovations at the start (all financed) — no way that is worth it, financially or from a mental health perspective — if our plan was to move in a few years after buying.

    As to transworld’s $500k cash burning a hole in his pocket, you can’t compare percentage returns in the market vs the house. Assuming you have the income to carry it, the $500k leverages you a $2.5m house (and maybe one with rental income). So you make a lot more from doubling the value of the house than doubling the value of a stock/bond portfolio. You might also be earning a rent “dividend” of $30/k year (but your monthly costs may be higher, perhaps significantly, though some will be deductible, etc. etc.). Not saying everyone must buy, but you have to look at the whole financial picture of each option, as well as how it fits into your life.

    • well said… I think these conversations also tend to miss the imposed discipline of home ownership that comes from 1) forced saving inherent in mortgage payments; and 2) illiquidity. most of us have a much harder time electing to save a fixed (and growing) amount every month–that’s the effect of the equity you build with each mortgage payment. and, while it’s possible to pull equity out of your home, it’s a hell of a lot easier to pull cash out of a brokerage account… both of the above tend to prevent people from spending as frivolously as they would otherwise.

  • Well put, slopefarm. I can only speak from my personal experience that buying in brooklyn was the best decision we ever made. Our first move was to put 5% down on a Williamsburg condo. In 5 years time the profit from selling was enough to purchase a frame house. We also did a ton of work, a lot of it ourselves, a lot of it financed, and two years later our home’s value has almost doubled. In both cases the cost of renting would have surpassed the cost of owning. The way I figure there is no way we could have saved the equivalent of what we have gained through real estate. Not even close. Plus we love it here, and there’s something to be said for that.

  • I stopped reading after it said the analysis was done based on data from Zillow. The zillow rental price on my place is 25% of the true market rental rate, whereas the purchase estimate is only slightly undervalued. Perhaps it’s more accurate elsewhere in the country, but the data is close to worthless n Brooklyn.

  • I know it’s just a financial exercise and debate, but to me the big reason for buying were the intangibles. The pride and freedom of ownership. No landlord over you. Making rennovations as you wish in order to make it YOUR home, knowing its adding to the value. Feeling more ‘settled’ and stable. And on and on.

  • Good to flip. Bad to buy/hold. “Bag” gets heavier, daily. Venice couple = genius.

  • The article is correct.

    Its better to rent! Much better to rent! Homeowners should sell their houses and move into rentals!

    Sincerely,

    The Landlord

  • Seriously what rentable living space in NYC costs “$1,956 a month or less.?