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
10:03,
sorry but i disagree…
1. pointing out falsehoods? somtimes owning IS better than renting, even now. this article offered no concrete financial data, no specific areas of study, no specific period of time. impossible to draw conclusions without empirical data…just one anecdotal story…
2. The 5 year period doesn’t mean anything in and of itself – “up” and “down” cycles are not and have never been defined periods of time – no one has a crystal ball, and even if you could define the period of time of a given “cycle” your investment success depends on what part of the “cycle” you bought and/or sold, as well as a myriad of other factors that are beyond the scope of this limited article. (like the quality and desirability/resale aspect of the property you bought!) Also, you could spend 25k on closing costs, pay high taxes, and easily get that money back, plus a hefty profit, sometimes within the first year or two.
some people will buy high and sell low, others will make money in a bear cycle and still others will lose money in a bull RE market if they made dumb choices to begin with. It all depends…
3. your “lost equity” point is actually a bit of a falsehood. Most people do not have the financial discipline to invest money as renters. In fact, most financial planners love the “forced savings” aspect of the monthly mortgage payment. It’s a very effective piggy-bank.
I’m not saying everyone should buy (in any market), and right now I might be somewhat encouraged if I were a renter hoping to buy in nyc. but that doesn’t change how i feel about this article. just look at published recent sales data in nyc, for example, and check prices now vs. one year ago – units are selling in nabes that were unknown five years ago. doesn’t look like values have dropped too much to me. and maybe they will, but no one can possibly know when or to what degree.
shahn–your math would work if that 800K was the only cost of owning a home for a year. it’s not. pay 15K in taxes, and you’re down to 25K. pay another 10K in heat/property maintenance over that year and you’re down to 15K. And, of course, you can only access that extra 40K if you sell the house after a year…which will net you a nice stiff federal/state/city tax bill.
10:13…I was just about to point that out. The market doesn’t need to appreciate 5% per year to make your equity investment in your home well worth while. I am personally a BIG believer in owning versus renting. Why should my hard earned dollars go toward paying someone else’s mortgage?
Not everyone has the money for a down payment, but if you do, it just makes way more sense to buy. I am a BK a resident with tons of friends in colleagues in the City. They are often shocked to find out that my mortgage is often significantly less than their rents (not even factoring in tax savings from interest). If you assume a decent size 2 bedroom is $4000 – $5000 per month, that translates into a whole lot of coop/condo/house, etc.
In terms of ROI, 10:13 gave a good basic example. It is a relatively no brainer!
Rent vs. Buy…Buy wins in my book!
Shahn that leverage works both ways. If you asset depreciates you have a greater loss. Did I just say that real estate could go down in price in NYC? Ok everyone pile on!
Got to get to work but I think that the Times article is so generalized as to say almost nothing. The Economist does much better economic reporting on real estate, particularly recent coverage of the sub-prime and CDO debacle. One thing you never hear about in this rent – buy thing is the issue of control. For example if you go to Forum and you see how many brownstoners are want to buy places “vacant” or who are in the throes of trying to figure out how to do their conversions and deal with tenants in place, i.e. eviction, buy out etc. Or discussions, extolling the value of the no-lease for maximum ease and flexibility with tenants. Think about being a tenant in an building that is up for sale. Not pretty, even if you are earning some money on the equities you bought with your savings on plumbing repairs and closing costs. If you are a renter in one of the thousands of new and barely occupied apartment buildings in Miami, hey maybe renting would work, but here, there are serious advantages to owning that have everything to do with having control of your living circumstances.
“your original $100,000 would be worth $140,000. It doesn’t even take the historical average of 5% home appreciation a year for the home to be a better long term investment.”
But that totally discounts the costs of owning a home also, such as maintenance. Sure, in some years maybe I just do a few things. But maybe you need a new kitchen one year, or a boiler breaks, or an old oil tank leaks and you have to call out the EPA. There are expenses one has when owning a home that too many people discount. I do think that owning over the long term is good, but that doesn’t necessarily mean that at this particular point in time it is smarter to buy.
The calculator is pretty interesting, and will allow you to make your assessment more local and use your own assumptions.
Who spends $200k on closing costs for a $1 million house??? And why do you assume David “conveniently chose” to ignore ROI, rather than was simply mistaken? This is a conversation, not debating team.
Nevertheless, you are right about the ROI that a down payment can leverage. It is also important to understand that, by purchasing a home, there are other costs, and savings, that you achieve that a renter does not have. And each individual has different needs for liquidity. All of which is to say that there are many markket-specific and individual-specific factors to consider, but that doesn’t mean one can’t learn some general principles of doing the analysis from an otherwise simplistic article.
By the way, that article was printed below the fold on the cover of the METRO section, not the cover of the paper…
Why does the Times print this article (title: Market Strong from Apartments in Manhattan):
http://www.nytimes.com/2007/04/03/nyregion/03property.html?ex=1176436800&en=289578d12dfa3854&ei=5070
below the fold on a Tuesday morning; then today puts this BS piece of journalism on the cover? This latest piece mentions ‘the coasts’ but leaves out the fact that prices in NYC have increased significantly over the last year. And that Brooklyn condo prices were up 22%. Kinda’ slanted if you ask me…
I wish someone would do a review of major real estate stories over the last few years to see how they were slanted and to determine if they were anywhere close to being right…