Rent vs. buy revisited

There’s a discussion going on in the comment section on another posting on the merits of renting vs. buying. I thought I’d move my response over to this main page and invite everyone to chime in. I never claim to be infallible (or I’m lying if I do) but the collective wisdom of the readers of this blog will probably thresh out the truth of things. So what do you think – rent or buy? Here’s my answer to “Anonymous, who first asked:

  • Anonymous, before this meltdown I would have referred you to the “rent or buy” calculator on the right hand side of this page and suggested you plug in appropriate numbers like how long you thought you’d own or rent, mortgage payments and property tax, etc. It produces a nice curve that gradually shifts in favor of buying the longer you stay and the lower your monthly expenses. But the kicker was always the appreciation. Even zero appreciation eventually produced a buy result, but it took a long time. Negative appreciation is something else.
    Paco, above, figured out that he could rent for the same amount as his property tax and forget about a mortgage payment. That’s a great deal. There are intangibles, of course, that homeownership can bring that may outweigh the freedom of just handing a landlord the keys and taking off, but in a declining market, those grow fewer, I think.
    I really don’t believe real estate will continue to fall, though, so my advice is to either rent until it’s clear that we’ve hit a final (for this time) bottom, which will cause you to lose some benefit of the bargain because we’ll only know that the bottom’s been hit when prices rise again and stay up, or buy now at a great price, by which I mean much lower (how’s that for specificity?) than houses sold for in 2005. I showed some houses yesterday that were, respectively, $975,000 and $575,000 less than they asked 18 months ago. That’s 1/3 to 25% off, and that’s a pretty good cushion against further decline.
    I also agree with Paco that houses are a deteriorating “asset”. I tell my clients that, while  splashy new houses will grow old and dated, the land, like “the Dude”, will abide. If they can stand it, I advise they look for an older house on great land rather than a beautiful new house on lesser land. But, understandably, some people like having modern wiring, great new kitchens and comfortable baths. Those don’t matter much to me – I’ve done without them for 50+ years, why go looking for them now? – but I do understand the desire. I just don’t think they make the best investments unless, as is beginning to happen, you can find a house that combines both great land, new, quality construction and a savagely reduced price. Then you have a winner, and should pounce.

    UPDATE: Here’s an article from yesterday’s WSJ suggesting that preventing foreclosures, and thereby keeping homeowners in MacMansions they can’t afford, is the last thing we should be doing. Can’t afford a house? Rent, the commentator says. 


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7 responses to “Rent vs. buy revisited

  1. anonymous

    Perhaps generational…perhaps cold-blooded financiers’ view…perhaps unique socio-economics of the modern financial industry (much of Greenwich’s buyer base)

    But know many 30-something, rather affluent financiers who view homeownership not as an investment, but as an expense of shelter if/when one has a wife and kids

    If single, can easily rent a series of new condos in Manhattan, much like one leases a new car every 1-2 yrs (has anyone <40yo actually bought a car in their lifetime? How archaic)

    Once married w/kids, it’s a Manhattan vs Greenwich debate…city vs suburban…relatively cheap suburban life vs astronomic costs of raising family in Manhattan

    If decide upon Greenwich, need new shelter of desirable specs….rentals universally suck in quality and involve periodic moves (tolerable as single; not tolerable as family)….99% of houses for sale (at any price) suck…land/house/used/poor-quality builder-spec, etc

    Greenwich’s natural advantage is land is cheap and plentiful; can easily get permit to build; can choose amongst the 2-3 most well-regarded architects/builders; build to bespoke specs in 18mos; have no intention of ever leaving until death (or divorce); will periodically renovate/update; structure is a depreciating asset anyway….land has some value, though not a great investment, as Greenwich land is likely to remain a cheap commodity

    Acceptable (and enjoyable) shelter is a necessary expense, but not an investment….and cost of quite decent Greenwich shelter (and overall COL) is a hell of a lot cheaper than any tolerable family lifestyle in Manhattan (15 CPW, need for wkend house, garaging costs, drivers (didn’t Thain’s driver earn ~$250K/yr), etc etc)

  2. PrimeTimeMom

    We were fortunate enough to sell our home in August 2008 after slashing the price to the bone (had to sell because husband was relocated from Los Angeles to San Diego). I was upset because we broke even and didn’t immediately have the cash for a down payment for a new home. I threw a bit of a tantrum about renting for the first time in 20 years of home ownership. Like Paco, we are now renting for about the same price as our former property taxes. We were fortunate to find a cute historic home in a neighborhood that is fun to live in. I am thanking our lucky stars that we didn’t buy in August. Prices are still going down here in San Diego and we plan to buy within the next six months after watching what is happening in the economy and the housing market. Hopefully we will time it right. I think there are bargains to be had in desirable areas here. Also, the only people selling right now are people who HAVE to sell ASAP and people who have to short sell their home. If you’re willing to go through the maze of a short sell then there are definitely good deals to be had.

  3. Paco

    Chiming back in:

    1) For 21 years, through, 2004, I was psychologically invested in the notion that it was important for someone of a certain education level, etc., to buy a house in a “better” neighborhood with gorgeous landscaping, etc. Then the price of that mindset – increasing taxes, ongoing maintenance, heating more space than I needed, etc. – suddenly didn’t seem worth it anymore.

    2) Home ownership has a cultural dimension: home ownership rates in France and Germany, which have living standards comparable to ours, are just 40-55%, whereas all the English-speaking industrial countries (US, UK, Can, Aus) have 67-70% home ownership rates.

    3) The bull market in housing not only gave people an unrealistic sense of their financial net worth, but it masked the relative liquidity (or lack thereof) of that investment. My house sold for 8% above asking price in less than two weeks in 2004. Today the time-on-market in that still-in-demand neighborhood in Seattle is probably a few months although prices in desirable neighborhoods are holding up better than in most regions. None of us knows when life’s circumstances will make us want to, or have to, move to a different locale, so the liquidity issue needs to be more carefully considered.

  4. CJW

    Do you have any data on the percentage that rents have increased in your market as compared to the percentage increase in median sales prices during the bubble? We own a row house in Baltimore where the market rental rate increased by 25% since 2000, though–at peak (early 2007)–its market value had increased by at least 100% over the same period. I now rent a townhouse in the DC suburbs where sale prices increased at a similar rate, and my hypothesis is that sale prices will ultimately fall to a level such that their growth rate (measured at the beginning of the bubble) will approximate the growth rate of rents. Any thoughts?

  5. Ach

    I don’t remember who said it, but to paraphrase:
    “It will be time to buy a house when everyone (MSM?) tells us it’s a great time to rent.” Probably a lot of truth to that.

  6. Anon E. Moose

    “$975,000 and $575,000 less than they asked 18 months ago. That’s 1/3 to 25% off…”

    Off the prior asking price? That’s supposed to mean something? Color me unimpressed when a seller drops their ask from simply ridiculous to merely sublime.

    You used-house salespeople like to give out swag with their picture on it… I highly recommend calendars because their sellers still seem to think it is 2005.

    • christopherfountain

      For one, yes. For the other, off the original listing price. Obviously, listing price was never the market value, or it would have sold. But I like sellers who, when they finally decide to try to move their house, take huge chunks off the price, rather than bleed to death slowly all the way down.