People have claimed for years that renting was a big mistake choice, everyone jumped on the bandwagon saying that buying a home was ‘a smart investment.’ Even your dog had a 10 year adjustable mortgage on his pimped-out crib in the backyard.
Looks like the tables have turned though. For now.
As the subprime crisis and housing bubble showed, when people start thinking of homes as an investment to earn money first, and as a place to live comfortably second, the housing market becomes a speculative bubble.
David Leonhardt from the NYTimes is a self described ‘Renting Evangelist’. He explains renting in some terms we might not realize:
Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying, on the other hand, involves multiple expenses, some of which arenÃ¢â‚¬â„¢t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest. (The mortgage-interest tax deduction reduces this last cost but doesnÃ¢â‚¬â„¢t eliminate it.) When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.
Leonhardt has been in the market for a move to the Washington D.C. area and was trying to figure out if renting or buying a house would be the smart move on his wallet. He admits there are some intangibles to the equation. Such as: knowing that with buying a home you don’t have to fear a landlord who will kick you out, you can settle in easier, you can paint the walls or redo the kitchen. But given those added incentives, the decision still comes out hazy in the current housing market.
Leonhardt’s plan of attack: He looks up the monthly cost of renting a house. Then he looks at the full value of purchasing a home in the same area. He divides the purchase price by the collective cost of 12 months of renting. He calls this the ‘rent ratio‘. I would have gone with ‘the housie number‘, but he’s the expert.
For the past several years rent ratios were super high nationwide (ranging from 20-25 in some of the coolest areas of the country). Because the prices on houses kept climbing with no end in sight it has been much more affordable to rent.
Leonhardt reports that those ratios are going down though, due to foreclosed homes getting auctioned off real cheap and the general housing market slowly improving.
The final verdict? He bought a home, because the ratio crept down to 15 in the market he was looking for. But that doesn’t mean it’s for everyone. It’s probably still too early with ratios still too high for most people looking for their best deal.
This should make everyone livin’ the good life in some super cool urban environment feel much better. As soon as I make the jump from paying rent to owning a home, I’ll be considering a few choice locales downtown. The abandoned slaughterhouse/ torture device factory and haunted insane asylum sound like fun fixer-uppers with decent asking prices.
Let us know if this advice has helped spur some serious longterm thinking in your mind. Where? The comments section of course.
NYTimes: Time to Buy? The Conversion of a Renter, May 28, 2008