patrick.net

Don't forget maintenance for owning a house.

And closing costs--which are as close to being money pissed away as it gets. Oh, sure, you get title insurance and pocket pool from the mortgage broker. Don't get me started.

ChrisKolmar says

7. Zillow's estimates (Rent and Value) are a super helpful tool, even if their accuracy is dubious.

Think about that statement. Would you want a doctor adjusting your medication levels based on measurements that are dubious? Would you consider such measurements helpful if they were off by one or more binary orders of magnitude?

I never got the reasoning that false information is better than no information. Who cares if the answer is wrong as long as it's quick?

SFace says

The whole key is the rent and price escalation. Otherwise the calculator is useless. It says to buy in the Ghetto and not buy in prime which is the opposite of reality.

Doesn't the ghetto have more room for growth than prime real estate? Much like small caps have more potential than large cap?

@Philstine
Those are included, but I thought they were common knowledge.

@Dan
Because it's not useless. Let's say its off by 20%, that's still a decent ballpark (+/- $300 rent or $20-40k home value)

@SFace
You have to make assumptions in any model. The idea is to create a best estimate forecast.

In theory, price and rents should have the same level of inflation, that's why I was ok leaving them out.

I bet most people, 90%>, don't know, or don't want to know, the theory that goes into a rent valuation model. Exposing them to the concept is worthwhile.

The results of a calculation, more so than the calculator, adds value.

And please don't make general comments like "stupid and lazy", too many conversations on this forum end up with people doing ad hominem attacks that add no value. Just explain your reasoning.

imo, that's why a forum site like this with incredibly valuable info doesn't go more mainstream. Average consumers won't wade through people yelling at each other for no particular reason.

ChrisKolmar says

@Dan

Because it's not useless. Let's say its off by 20%, that's still a decent ballpark (+/- $300 rent or $20-40k home value)

and if it's off by 100% or 200% as it often is?

Dan8267 says

and if it's off by 100% or 200% as it often is?

Then there are problems. Just check before you use it:
http://www.zillow.com/howto/DataCoverageZestimateAccuracy.htm

SFace says

Of course its stupid and lazy. If you have looked at Palo Alto and the calculator and 0% and 0%, you would have burned the damn thing.

Please explain your logic.

I think that it is reasonable to run the buy vs rent scenario with both increasing at inflation rate. However, they don't cancel each other out at all since the starting number is different right away.

SFace says

bacause the result has proven to be wrong by a wide margin.

Still not an explanation. Price inflation outstripped rent inflation? Under performed?

The only case where the calculation comes out as loss to the home buyer is when rent falls relative to the price they paid. For example, I am looking in Durham, NC.

With all maintenance, tax, opportunity cost, and such my monthly payments for buying a house are $1300. I could rent the same house out based on craigslist, trulia, and zillow for between $1300-$1600.

So in this case, the only way I get screwed on a month to month basis is if rents drop precipitously.

The calculation doesn't care about whether I lose equity or if prices go up faster than rent.

Am I missing something here?

I guess I would also be screwed if:
1. Taxes go up
2. Maintenance is much higher than I expected

Otherwise:
1. My mortgage is fixed.
2. Home owners insurance is fixed.
3. Opportunity cost is fixed (I assumed 8% return on my down payment, annually)

ChrisKolmar says

@Philstine

Those are included, but I thought they were common knowledge.

Okay. It wasn't obvious from your post. You broke out several specifics, but closing costs don't really fit into any of your categories.

Philistine says

closing costs don't really fit into any of your categories.

That was a good addition. Thanks for it.

Forget all calculators and comparisons ! You rent for 30 years during which rent will go up and you end up nothing to show for it because you still have to pay rent after 30 years. You buy and pay mortgage and all other expenses but after thirty years you don't have to pay mortgage and the property will have a value atleast 3-4 times it's original price. So after owning it for 30 years you will be sitting on a property FREE and CLEAR which you can sell and downsize, buy smaller home 100% cash and still have enough left for other expenses !
No, I'm not a realtor. Just a home and rental properties owner.

ChrisKolmar says

In theory, price and rents should have the same level of inflation, that's
why I was ok leaving them out.

The flaw is that price and rents don't offset each other. Future price increases and future rent increases BOTH shift the rent vs. buy in the direction of buying.

tatupu70 says

The flaw is that price and rents don't offset each other. Future price increases and future rent increases BOTH shift the rent vs. buy in the direction of buying.

Oh yea, good point. Rent going up is good for buying. Prices go up is good for buying. 1 + 1 != 0 ;)

Real question, have rents ever fallen anywhere? I'll Google it now :)

I'm pretty sure my rent vs buy calculator would have told you not to buy during the peak because it doesn't include price/rent inflation. Right? Patrick knew. Calcualtedriskblog guy knew. They were looking to this type of analysis to base their judgement.

My real goal in looking at the rent v buy calculator is to minimize my chances of getting screwed given a base set of assumptions.

And as a hedge against hyper inflation ;)

robertoaribas says

Of course rents can fall...

BUT, in the long run, they are going to rise on average.

Rents can and do fall, and they do tend upward in the long term, but only nominally not for real.

If you compare rents to wages in the long term, I'd bet you the ratio is pretty much constant. It obviously has to be. Rents cannot take an ever-increasing fraction of wages forever.

Nor can house prices!

So most if not all housing "appreciation" in the long term is just self-deception about inflation.

Sure, you might make money by leveraging against that inflation (borrow and hope inflation destroys the value of your debt) but it's no sure thing and got tons of flippers into trouble just moments ago in historical time.

KarlRoveIsScum says

Hence prices cannot sustain RAISES of 8% a year which is the necessary increase you require to profit from home ownership.

The whole point of the rent/buy concept is that prices shouldn't have to go up for it to be a sound investment. Prices going up should be gravy, not assumed.

KarlRoveIsScum says

ChrisKolmar says

Real question, have rents ever fallen anywhere? I'll Google it now :)

A renter can always move , a renter has motive to be flexible.

Paradigms have changed , you used to work and live in the same place for 30 years and get your pension and health insurance.

These days are over.

Employment means being flexible on location.

To be "flexible" and never buy as a result would be living akin to a 3rd year undergraduate student who has no idea what kind of job they will have after graduation. That's no way for adult to live in america!

robertoaribas says

actually, I buy homes that would do just fine for me, even if rents and prices had appreciated at 0% forever. I actually run the New York times rent/buy with 0,0 and 11 months rent, and they STILL work out far better for me as an owner, than for the renter...

There's the money quote and what I am trying to get out with my calculator/assumptions.