Is It Better to Buy or Rent Your Home?
David Leonhardt observes that, contrary to the hype from real-estate agents, it probably doesn’t make sense to buy a house right now unless you intend to remain in it for a long time.
With the spring moving season under way, The New York Times has done an analysis of buying vs. renting in every major metropolitan area. The analysis includes data on housing costs and looks at different possibilities for the path of home prices in coming years. It found that even though rents have recently jumped, the costs that come with buying a home — mortgage payments, property taxes, fees to real estate agents — remain a lot higher than the costs of renting. So buyers in many places are basically betting that home prices will rise smartly in the near future.
Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.
There is obviously no way to know what home prices will do in the next few years. But there are two big reasons to doubt the real estate boosters who insist that it’s once again a great time to buy.
The first is history. After the last big run-up in house prices, in the 1980s, a long slump followed. In the New VaYork area, prices peaked in early 1989 and then fell 9 percent over the next three years, according to government data. (Adjusted for inflation, the drop was much bigger.) Not until 1998 did prices pass their earlier peak. Keep in mind that the 2000-5 boom was even bigger than the ’80s boom and that house prices on the coasts, according to the official numbers at least, have fallen only slightly so far. So it is hard to imagine that prices will rise 5 percent a year, or another 28 percent in all, over the next five years.
The second reason for skepticism is that buying has never been quite as beneficial as Realtors — and mortgage brokers, home builders and everybody else who makes money off home purchases — have made it out to be. Buyers have to pay property taxes on top of their mortgage, while renters have the taxes included in their monthly rent bill. Buyers also face thousands of dollars in closing costs (and, in Manhattan, co-op charges). Renters, meanwhile, can invest what they would have spent on closing costs and a down payment in the stock market, which hasn’t exactly delivered a bad return over the last 20 years.
And that famous mortgage-interest tax deduction? Yes, it reduces the borrowing costs that come with a mortgage, but it doesn’t eliminate them. Renters don’t face any such borrowing costs.
Clearly, there are benefits to owning a house beyond the financial, like the comfort of knowing you can stay as long as you want or can fix the roof without permission. But real estate has been sold as more than a good way to spend money. It has been sold as a can’t-miss investment. Back in 2005, near the peak of the market, the chief economist of the Realtors’ association, David Lereah, published a book called “Are You Missing the Real Estate Boom?” The can’t-miss argument was wrong then, and it may still be wrong today.
They have an interesting interactive widget that helps you determine whether buying or renting is more economically feasible.
The problem, of course, is that the two key variables–the annual home appreciation price and annual rent increase–are unknowns. One can rely on historical averages, of course, but real estate prices can be very volatile.
Home ownership is undoubtedly a risky financial proposition. Aside from the issues Leonhardt discusses, there can be major additional expenses that come from repairs, maintenance, insurance, flooding, and other issues. None of those are responsibilities of a renter, although the assumption of those risks is, presumably, factored into the monthly rate. Still, most of us do it for the “beyond the financial” benefits.
Via Mark Kleiman, who uses it as an occasion to vent on a pet peeve:
A person who sells houses for a living is a real estate agent, or real estate broker. “Realtor” is a made-up word, and a registered trademark of the real estate cartel, which does an excellent job at preventing the falling transactions costs enabled by improving computer and communications technology from being available to home-sellers. Why do reporters insist on using that silly label? Is the guy who sells bedroom sets a Furnitor?
A fair point.