Wednesday, April 21, 2010

Renting v. Buying

David Leonhardt has a nice piece in The New York Times today about buying versus renting and when it is better to do the former. Increasingly the answer is now, given the plummeting values of homes.  In the past the benefit to owning a home was the expected increase in the asset value of the home itself and so most people paid a premium for living in a home they bought versus a home they rented. But that calculus has been turned on its head with home prices plummeting, low mortgage rates, as well as the fact that mortgages are harder to qualify for and thus there is a resulting increase in demand for rentals. There are also generous tax credits still available (but not for long) if you are a first time homebuyer.

Here is Leonhardt:

In some once bubbly markets, prices have fallen so far that buying a home appears to be a bargain, based on a New York Times analysis of prices and rents in 54 metropolitan areas. In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis.

But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began. People who buy a home in these areas will face higher monthly costs than if they rented, even after taking tax deductions into account. As a result, buyers are effectively betting that prices will rise enough in future years to cover the difference.
So, sorry Portlanders, renting will still be cheaper in the sort-run according to this analysis.

Obviously, owning a home brings benefits that are not strictly financial. It offers stability and, for many people, comfort. ... Even in Manhattan, San Francisco or Seattle, a family confident that it will stay put for a decade or more may well be wise to buy today.

But it’s worth remembering that the advantages of homeownership are frequently exaggerated. The mortgage-interest tax deduction doesn’t eliminate the cost of borrowing money; it merely reduces it. The freedom to paint your house any color you wish comes with the responsibility of paying for a new roof when the time comes. The $15,000 or $30,000 or $50,000 that real estate agents’ fees add to the price of a house can wipe out a lot of other savings.

The most striking part of the current situation may be that despite everything that has happened in the last few years, there are still places where renting does not get enough respect.

When I lived in Ithaca, New York - during graduate school - the local property market was in a severe depression.  I quickly calculated that I could save a lot if I bought a house rather than rented.  So, after my first year, I bought a small house on a double lot a very short walk to the Cornell campus and just a couple of blocks from the Collegetown commercial district.  I lived in about twice as much space as in my former apartment, had a huge yard to enjoy, and saved money.  Of course I had to have some money for a down payment which my parents helped me out with, but the purchase price of $85,000 was tiny even for 1996.  I sold it four years later and made a small profit to boot - but that was not the point, it was to have a nice place to live for the four remaining years I was to be in Ithaca.  [I now deeply regret doing so, I would have loved to have held onto it for sentimental reasons and subsequently the Ithaca market recovered strongly and remains pretty strong] The obsessive focus on homes as assets only obscured the fact that houses are also places in which we live, and have immense value for this purpose as well.

There is a psychological benefit owners get that I think is non-negligible: ownership itself provides utility, in the economics parlance, regardless of the increase in the value of the asset.

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