Oh, Inverted World: Renting Better Than Buying?
As prices for residential real estate were reaching all-time highs around the country back in 2005, the smart money decided to wait it out on the side lines in a rental, says the New York Times today. And even though purchase prices have fallen considerably since then and rents have ticked up, when you add…
As prices for residential real estate were reaching all-time highs around the country back in 2005, the smart money decided to wait it out on the side lines in a rental, says the New York Times today. And even though purchase prices have fallen considerably since then and rents have ticked up, when you add in all the expenses of owning (taxes, maintenance, mortgage), it’s still a better bet to rent in most markets. For buying to make sense, the article asserts, you have to believe that your local market will appreciate five percent a year for the next five years. Do you think Brooklyn, and New York City as a whole, can do that?
A Word of Advice During a Housing Slump: Rent [NY Times]
Photo by bondidwhat
here’s my take…
i have been a renter for almost 7 years, and very recently have become an owner (in bklyn) and i much prefer the latter. but here’s the thing: in new york, especially the arguement about renting to save cash doesn’t really work like it might in other places. i can only speak for myself and for those i know, but when you’re a renter here in new york, it doesn’t really seem to matter how much money you make or have, we seem to spend it all. saving anything of substance becomes very difficult. part of it is the lifestyle of big city living. so to become an owner in new york is in my mind very much like having a child. you commit to it. it has only been since i’ve bought my place a few months ago that i even feel like saving money is possible. even with such a large (for me) purchase. buying a place here is something you throw yourself into, and to say it’s better to rent because you are going to save more money….be honest with yourself…how many of you renters are actually saving much money???
buying here is tough…but if you’re the kind of person who craves stability and more of a sense of community (which is one of the best parts of owning for me) it becomes a personal choice. for many, owning something in new york gives a sense that you are connected to something in a city where things can get so hectic, crazy, etc. some people enjoy that feeling, and some don’t.
Anon 10:44. Most sensible post.
I own. It was a good idea for me to buy when I did (in the ’90s). But I don’t think my house value will go up 5% a year for 5 years.
But… if I didn’t own and was thinking about buying now, would I wait? Probably not. Because (1) what the hell does a layman like me actually know about what the price of ANYTHING is going to do? (Did I know my house was a good buy at the time? Hell, no!) And (2) I just don’t know that I’d want to forgo the intangibles of owning for 5 years or however long for the timing to be right–I can’t get those 5 years of my life back. But that’s totally subjective.
I’ll be buying first property soon but going in with eyes wide open – I fully expect prices to drop in near term and may stay down for a while. So why not keep renting? Because I don’t want to delude myself into thinking i can time the market – even though it looks to me like all the towers in dumbo, williamsburg, plus the endless contstruction on every block in brooklyn will flood the market sooner or later, i can’t predict when that will happen or what kind of effect it will have. More important, I’m buying much more space than I need now with the assumption that I will grow into it, and stay much longer than the 5-year horizon most people use. And some of it, I’ll admit, is psychological – I’ve lived here 10 years and have had to move twice when my landlord sold the house I was living in. There’s a value in knowing that I control my living space that is admittedly a bit irrational. But then, so is much of this discussion.
Real estate has appreciated historically at around 3% to 4% per year for the last 100 years , i see no reason why we can’t expect the same plus adding 1% to the mix depending on job growth and GDP growth. Prospects for Brooklyn and Manhattan are great, the desire of people from all over the world who want to live here remain high. If you think about it where else is there to live in the United States? San Francisco and Chicago are the only other comparable places And they are really not the same.
Despite some of these hysterical replies (on both sides) no matter which way you cut it, if you are honest with the numbers then renting is still cheaper than buying UNLESS you also expect fairly continuous capital appreciation as well (eg, the 5% a year the times mentioned) _and_ you are free to sell when the time is right – not forced to sell by a job change or whatever at what might be a market down-tick. If you are going to buy and hold for 10 or more years then you can be confident the maths vs renting will start to work out. But I think a lot of buyers around now are not thinking of having to hold for that long.
Unfortunately (or fortunately) there is a reason people will pay a premium to buy and that is the intangible benefit of being able to do things to ones abode that a landlord would never let you do. Obviously for many people that benefit is worth the extra expense of buying over renting (or the risk of relying on capital appreciation to make the maths work out).
And to those who think that anything bought can be sold easily, please remember the spread on property is probably close to 10% when you take brokers and taxes and fees into account. So when you get the title deed, you might take several years of a steadily rising market to claw back the expenses you incurred to own it, and the expenses you will incur to turn it back into cash again.
Shane, what about interest costs? As you illustrate, leverage is a beautiful thing. But leverage has cost in the form of interest. Your example implies that you will have ‘made’ $40K more due to leverage. However, you seem to have omitted interest costs? Even if you had an IO loan @ 5.5% you’d still be paying almost $40K in interest.(Not to mention PMI since down payment is less than 20%).
So how exactly is buying better than renting over a 5 year timeline?
ben stein had a good article a few months ago in the times about house appreciation, and how over 20 years his vacation home, when taxes and maintenance etc. are taken into account, barely kept up with inflation. obviously there are periods of time where prices jump up and huge profits can be made, but he was arguing that in the long term, real estate is not the be all end all.
this is confirmed in a 400 year study of amsterdam real estate values. they also basically kept up with inflation.
I’m not saying don’t buy.
If you live in Flordia you can easily rent a home that is comparable to one you’d like to buy. Go ahead and try that in NYC. Look at the Corcoran website. They have all of three houses for rent. the cheapest is $8K per month. Don’t know what the broker fee is but assume it’s 1 month. The max you’ll get is a 2 year lease.