September 25, 2005


Is It Better to Buy or Rent? (DAVID LEONHARDT, September 25, 2005, NY Times)

THE thought has occurred to just about everybody who owns a home in a hot housing market: maybe it's time to cash out.

The hard part is figuring out how to do so. Only a few families can actually pick up their life in, say, California and move it to Nebraska. The other option - renting - has long been derided as the equivalent of throwing money away.

But renting might deserve another look right now. After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.

Owning a home often ties up hundreds of thousands of dollars that might be invested more safely and more lucratively elsewhere over the next decade. And while real estate brokers may hate to acknowledge it, home ownership involves its own versions of throwing money away, like property taxes and the costs of borrowing.

Add it all up - which The New York Times did, in an analysis of the major costs and benefits of owning and renting, including tax breaks - and owning a home today is more expensive than renting in much of the Northeast, Florida and California. Only if prices rise well above their already lofty levels will home ownership turn out to be the good deal that it is widely assumed to be.

In the Bay Area of California, a typical family that buys a $1 million house - which is average in some towns - will spend about $5,000 a month to live there, according to the Times analysis. The family could rent a similar house for about $2,500, real estate records show, and could pay part of that bill with the interest earned by the money that was not used for a down payment.

Now, if only human nature were to change so drastically that people would stop desiring a home of their own and develop such discipline that they'd actually invest the money they saved by renting the Times might be on to something.

Posted by Orrin Judd at September 25, 2005 9:32 AM

What's being left out here is the independence of living in your own little castle where you make the rules. Can't put a price tag on that.

Posted by: erp at September 25, 2005 10:02 AM

Erp is exactly right about the value of having one's own castle.

What also drives home ownership is that by owning, one has selected his or her heighbors, to the extent possible. Home ownership in most cases necessitates a degree of discipline and other desireable traits. Accumulating a down payment, qualifying for a mortgage, things like that, tend to make home-owners the kind of people we would prefer in our community. Most importantly, home-owners are more likely to have raised the children we would prefer to have our own children go to school with.

Posted by: Lou Gots at September 25, 2005 10:44 AM

Add some acreage around your castle, and you'll think you own a small country. I go for a walk every morning and always carry my .22 caliber bolt action rifle. I even have my own little army.

Posted by: AllenS [TypeKey Profile Page] at September 25, 2005 12:13 PM

I'm paying $1,000 less/month (if you figure in property taxes and mortgage-related fees, insurance, etc) for a brand new townhouse in a part of Houston that is rapidly developing (midtown) than most folks who have bought these properties. You'll be pleased, Orrin, that I can walk a fair distance (about a mile) and ride our little choo choo into downtown or to the Medical Center, and I'm also close enough to work (in the Galleria area) that the commute is very short.

So why not pocket the $1000 each month, especially when these properties are overpriced and probably won't suit my needs at some point down the road?

I know, most people won't do that, but it makes great sense to me. To buy something and pay an amount comparable to what I'm paying for this inner-city property, I'd have to move 30 miles out from the city core, endure the hell of hour-long commutes, and not be near the choo choo to nowhere. Ownership doesn't mean enough to do that to myself right now. :)

Posted by: kevin whited at September 25, 2005 12:29 PM

Where do the kids play?

Posted by: oj at September 25, 2005 12:35 PM

at the neighborhood park with all the other kids

Posted by: Shelton at September 25, 2005 2:33 PM

Kevin, If you buy your townhouse, in five or ten years when it doesn't suit you anymore, you can rent it to some other fiscally astute reader of the NYT and use the income to buy another place, or you can sell it and realize perhaps a two or three hundred percent profit -- even more depending on its location.

No matter what the NYT says, renting isn't smart. Remember, liberals don't approve of us cogs owning our own homes, driving our big gas guzzlers, or being independent of government control. They want us to be good little interchangeable workers in their big socialist machine who are beholden to them for our daily bread and everything else.

Posted by: erp at September 25, 2005 2:36 PM

Renters are more likely to favor rent control, higher property taxes and legislation or court rulings that forces landlords to rent their property to people whose lifestyles the owner may find objectionable.

Posted by: Vince at September 25, 2005 5:05 PM

All I want to know is, where in the San Francisco Bay Area can I rent a $1MM house for $2,500 a month?

Posted by: Mike Daley at September 25, 2005 10:20 PM

Check Andrew X on the previous post. He's the one with the fantasy scenario, maybe he knows.

Posted by: erp at September 25, 2005 10:48 PM

If markets were at all well behaved, renting and buying would equilibrate. The fact that some markets have gone way out of whack suggests that the canny consumer should arbitrage the difference to make a long term profit.

The markets that are out of whack are characterized by supply problems that local authorities should remedy by adapting zoning regulations, abolishing rent control and redeveloping run down areas. In addition, banking regulators should move to decrease the credit flow to the affected area by emphasizing traditional underwriting standards (debt to income ratios, minimum down payments of at least 20%, etc.) and banning instruments that add unpaid interest to principal on a non-defaulted mortgage.

Posted by: Robert Schwartz [TypeKey Profile Page] at September 25, 2005 11:26 PM

The scenario is no more fantastical than people quitting their jobs to become daytraders during the big market boom. I don't think people who see their houses as, well, their homes would sell simply to cash out and then rent. But there are those who see themselves as he-man master of the universe types who buy property to flip and these might consider selling and then renting to free up cash for their next big shot at a fortune.

More likely, people who don't already own a home may decide to put off buying until the market improves for them. Despite what some may think, the local housing market does fluctuate.

Posted by: Chris Durnell at September 26, 2005 12:40 PM

Chris, we bought our first home, a new two-family house in Queens (one of NYC's five boroughs) in 1955 for $16,500. It has a nice view of the midtown skyline and is within walking distance to the subway and Queens Blvd which has bus service to Manhattan. It's worth probably in the $800,000 range today. No, we weren't smart enough to keep it, but that's a story for another day.

Over the past 50 years, we've bought and more than a half dozen houses in New York, Connecticut, Vermont and Florida and NEVER have real estate prices gone down during that period. They leveled off a bit during the Carter years when interest rates sky-rocketed into the 20's, but housing prices never actually declined.

Posted by: erp at September 26, 2005 1:42 PM