patrick.net

13.2% increase in rent OR
6% decrease in a 5-to-1 leveraged investment

I wonder which one nets you more? Hmmm

1500 rent x 13.2% x 12months = $2376 per year
300K x 6% = $18000 per year

But but but, it is a great time to buy! Honest. Please please, I am behind on my Mercedes payment and I have a drinking problem to support.

You guys can do the math for the numbers below.

New estimates from Zillow show that median rents rose 3% from January 2011 to January 2012 nationally, while home prices declined 4.6% over that time period. In Los Angeles and Orange counties combined, rents climbed 4.6% as home prices fell 6.2%.

My apt building in LA is at 100% occupancy for first time in 3 years - about 120 units.
They havent raised my rent yet tho.

my rent has been increasing by $50 for the past two years in MA.

a better observation is...what ISN'T going up these days with the printing press going full speed? gas, rent, food, commodities, even BVSN LOL.

one exception has been housing which according to several RE "experts" has been "flat."

now we know what flat means exactly (down).

Home prices need to fall a lot every year to make renting worth while. If not, then waiting is no advantage at all.

In other words, you rent a house that costs 500k for 2500/month = 30k/year in rent.

If the house sells for 470k after one year, you have not gained anything by waiting.

If the house sells for 480k...you lost money by waiting even though home prices came down.

over 3 years you spend 90k on rent. So you need the house price to fall more than 90k.

So a 500k home in 2012 would have to be a 400k home in 2015 (not like renting really paid off in that scenario, break even). If you look at the last 2 years. No sign that we are going down at that rate at all. We are right now hovering while drifting slightly lower. Not enough to make renting the same house worth while. Although, a lot of people are realizing that.

Rents are flat in some area's and going up in others. Home prices are going lower but at too slow of a pace for renting at these high prices to pay off. Very different than in 2003 when I was renting a house for 2200 that cost 800k to buy. VERY different now.

SubOink says

Home prices need to fall a lot every year to make renting worth while. If not, then waiting is no advantage at all.

In other words, you rent a house that costs 500k for 2500/month = 30k/year in rent.

If the house sells for 470k after one year, you have not gained anything by waiting.

If the house sells for 480k...you lost money by waiting even though home prices came down.

over 3 years you spend 90k on rent. So you need the house price to fall more than 90k.

this analysis is completely wrong.

SubOink says

n other words, you rent a house that costs 500k for 2500/month = 30k/year in rent.

If the house sells for 470k after one year, you have not gained anything by waiting.

If the house sells for 480k...you lost money by waiting even though home prices came down.

House sells for 470K in one year you don't lose anything? Wow. You lose all the closing costs, the maintenance costs, the mortgage interest, the property taxes, etc. etc. Your calculations are not detailed enough. Please please start using Craigs calculator and set up your own assumptions. This super simple comparison does nothing to comparing renting to buying. There are expenses on both side and they need to be looked at properly.

RentingForHalfTheCost says

House sells for 470K in one year you don't lose anything? Wow.

Are you selling after one year?

Why does it matter what the house is worth on paper to the one that lives in it, pays his monthly payment.

And anyways...

If you buy a house for 500k right now...

or rent...throw out 30k

then buy for 470k - how have you gained financially?? Please explain.

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

Saw this on late night news, they quoted Zillow as a source, Sunday I saw a really big rental unit going up in the city I live in, and it's probably just one of many, one bedroom condo's are going for 60-70k and less for some, so we are looking at some parity in my area.

just for the sake of making a point...

lets say you rent for $30k a year a house that keeps loosing value of 30k a year...

2012: home price $480k

16 years later

2028: home price $0.00

Wow. Waiting paid off, you now get the house for free!!

Except

Rent paid over 16years: $480k

Get the point?

I doubt that home prices will be $0 in 16 years. I doubt that home prices will be less than now in 16 years.

Renting is too expensive at this point. The only reason for not buying should be...you don't have a financial cushion, no job and don't qualify for loan or need to be highly flexible due to a job that makes you be able to move every 6 months. But if you are renting because you think you are saving just tons of money. I think you are wrong. Mark my words.

SubOink says

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

You did not include the interest, tax, closing fee, and maintenance among others a house owner needs to throw in. There is a rent versus buy calculator on this website which factors all these in.

Mobi says

You did not include the interest, tax, closing fee, and maintenance among others a house owner needs to throw in

Yes, I also did not include the tax deduction of the interest etc...and rent increase. I am using a simplified version to make a point.

Closing Fee? In this market you make the seller pick that up. We did.

SubOink says

RentingForHalfTheCost says

House sells for 470K in one year you don't lose anything? Wow.

Are you selling after one year?

Why does it matter what the house is worth on paper to the one that lives in it, pays his monthly payment.

And anyways...

If you buy a house for 500k right now...

or rent...throw out 30k

then buy for 470k - how have you gained financially?? Please explain.

You were the one that said "sell in 1 year".

Lets make it easy to understand by assuming you actually have the full cash (no mortgage) to purchase at 500K.

So buying at 500K give you the yearly cost of maintenance and taxes. Lets say they are 2% of purchace annually (1% each). So, on top of tying up your 500K you have 10K of annual expenses.

Now lets think about the renting. You have out of pocket 30K for sure. That is all though. Any problems or taxes are all paid for by the landlord. You do have something else on the positive side. You have your 500K making money for you in a real investment. Lets assume you don't like any risk at all and you just stick it companies paying 3-4% dividends (many to choose from). After dividend tax you clear 3% say. That is a cool 15K per year. So, it really only cost you 15K to rent that first year.

So, if you bought you would be down 10K yearly cost.

The renter now has 485K in savings (only cost him 15K to rent). And can pick up the 470K house (same house) and have 15K to do a nice trip with the family.

Net effect is the renter is better off by 25K over the buyer in one year in this situation. Obviously this is very simple, but much closer to the real analysis than just doing it the way you are trying.

If you look at a 1 year period it is almost always better to be renting, but that goes against the entire point of purchasing a house. Who buys a house and moves every year? And the fact is houses cannot depreciate to zero, if you think that they will inevitably lose value each and every year till they are practically nothing, or if you think there is going to be some sort of huge 65% drop, you are out of touch with reality.

In general, if you are young, dont know if you want to live in the same place for the next 30 years, or dont have a steady enough job it makes sense to be renting. If you have solid employment, a family or plan to start a family, like where you are living and want to be there a good while, and aren't going to make yourself house poor with a ridiculous mortgage then I would be looking to buy.

Here in NY rent goes up 3% yearly or more. When you look for a rental you need first and last months rent, security = to one months rent, and 10-15% for a brokers fee. That amounts to a lot of money. You rental numbers don't seem to take this into account.

Monthly rent of 2500 means your paying 3 grand to the broker and that is the low side. Outside of manhattan you will probably find the broker fee equaling one months rent more often, but that is still a good chunk of change. Now pay that every time you want to move, and the rents keep going up. That is NYC though, ymmv depending on location. I am very money conscious, and I have concluded its a rip-off to rent where I live, and only did so for as long as I absolutely had to, and that is not even taking into account the many nuances of renting that I dislike

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

SubOink says

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

yes.

ThreeBays says

Good explanation, RentingForHalfTheCost.

Though, rising rents would increase your cost each year, and if you play out that fixed-income pays rent example, over time your bank would be completely gone with no asset left.

In terms of assumptions, how many years would you expect the price to drop 30k y/y? Over 6 years it would have to drop 180k, or 36% from today. Over 10 it would have to be 60% from today. Helicopter Ben is going to make your 500K into toilet paper before that happens. :D

Absolutely agree. My points where just examples showing some of the holes in the original conclusions. If you buy and hold for 7 years ( the average) then you need to analyze the whole picture. If you read this report it goes into all the details and does a great comparison. The final conclusion is that over 8 year periods the last 30 or so years it was actually always better to rent verses buy. There are assumptions in that analysis though. It assumes you would actually invest in the savings you get from renting and not spend it. That is not for everyone, a house is a great forced savings account for many. I have the fortitude to save without a house, so I look at it from that side.

Anyway, here is the article. A great read if you have the time.

http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

As you will quickly see, it is not as simple as looking at the monthly costs of the mortgage verses the rent payment. It is much much deeper than that.

Hysteresis says

SubOink says

Hysteresis says

this analysis is completely wrong.

is it? why? because you say so?

yes.

+1

SubOink says

Mobi says

You did not include the interest, tax, closing fee, and maintenance among others a house owner needs to throw in

Yes, I also did not include the tax deduction of the interest etc...and rent increase. I am using a simplified version to make a point.

Closing Fee? In this market you make the seller pick that up. We did.

I did not say your "conclusion" is wrong. I'm only saying your oversimplified model does not work for me. Since I'm the only one working in my family, interest tax deductible pretty much has zero benefit for me and the tax is relatively high (no property tax cap here.) Those two adding up are far more than half of my rent. And I just got a rent reduction rather than increment. Therefore, I need less than 3 percent depreciation to beat renting. And, my real concern is once I lose my job, I need to move out of the area. So, flexbility is quite important nowadays.

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In my line of work I meet people from all walks of life and get to hear about their personal living arrangements. I meet people who rent a room in a house for $500 a month, man and wife, sometimes with kids. ONE ROOM! Sometimes they will just rent out the couch in a house (usually illegal immigrants)

Then I met a man who bought a house for cash as-is. Seven million dollars! He is a young man, too.

Amazing. I have never lived in such a place, such a time, where you see such a wide spectrum of poverty and utter ridiculous-lucky wealth.

What is your occupation? I am intrigued.

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states
which are much cheaper and would welcome the addition of new
Bay Area jobs.

Actually, the are not CA employers, since they are incorporated in Delaware. so it goes.

If you don't own a house now, you will be priced out forever.

thomas.wong1986 says

Helloeeze says

I heard on the radio today that 58% of people in the Bay Area can't afford a 2-bedroom apartment.

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

which are much cheaper and would welcome the addition of new

Bay Area jobs.

Actually, the are not CA employers, since they are incorporated in Delaware. so it goes.

Why should employers adjust to match the over inflated house prices? If you agree there is a correlation between the house prices and incomes, then you also agree that there is potential for the house values in the BA to continue to fall. I actually think the BA salaries are too high sometimes. I am always amazed when I see the salaries of the public workers around here. 200K for a police officer? 100K+ for Postal workers. The only place on the planet that has amazed me more with salaries is Switzerland. That place makes the bay area look like a back ally. I paid over $80 US for a medium pizza once. It wasn't even a good one. ;) Good thing I was on expense.

xenogear3 says

If you don't own a house now, you will be priced out forever.

That is so not true. Scare tactics worked in 2003, but now people are wise to the realtor cries. Try another angle.

RentingForHalfTheCost says

then you also agree that there is potential for the house values in the BA to continue to fall. I actually think the BA salaries are too high sometimes

Yes. that is fairly clear, home prices, rentals, and salaries will need to fall for CA to keep employers and employees in CA in order to compete globaly and with othe states.

Its a much different economic landscape than 1970-2000.

RentingForHalfTheCost says

That is so not true. Scare tactics worked in 2003, but now people are wise to the realtor cries. Try another angle.

They will continue with this nonsense crap and it wont end..
Next time a realtor say,,, home prices are going up.. tell them "so will my foot... right up your ass."

So Cal is so peppered with RE interest and many were in denial that So Cal prices would ever fall. But they did and so do rents.

http://dqnews.com/Articles/2012/News/California/Southern-CA/RRSCA120215.aspx

Southland Home Sales Flat, Prices Edge Down

Februry 15, 2012

La Jolla, CA---The Southland housing market started 2012 with slightly higher sales and slightly lower prices despite record-low mortgage interest rates. Home sales skewed toward the lower price ranges, which is normal for January, as many traditional buyers retreated and investors snapped up homes at a record level, a real estate information service reported.

A total of 14,523 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was down 24.5 percent from 19,247 in December, and up 0.4 percent from 14,458 in January 2011, according to DataQuick of San Diego.

Sales have increased year-over-year for five of the last six months. The sharp sales decline from December is normal for the season. Last month’s sales count was 17.8 percent below the 17,671 average for all the months of January since 1988.

Helloeeze says

Then I met a man who bought a house for cash as-is. Seven million dollars! He is a young man, too.

It used to be that kids burned through their inheritances in more interesting and debauched ways than residential real estate. How depressing.

thomas.wong1986 says

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

This has never been more true. If you aren't getting bonus and RSU, you should leave the area. I'm figuring I have to go in a few years.

Helloeeze says

no, actually he got the money from an IPO.

Of course! Who hasn't? Still, what a stale place to sink all that money. Easy come, easy go, I guess.

Mick Russom says

thomas.wong1986 says

In another words, employers in the BA are unwilling to pay higher salary to adjust for higher rentals, there are other states

This has never been more true. If you aren't getting bonus and RSU, you should leave the area. I'm figuring I have to go in a few years.

That is the part of this area that sucks. I think the trick here is to find a way to live in this place without giving away your first born on housing. Not easy around here, but doable if you put in the energy.

RentingForHalfTheCost says

You have your 500K making money for you in a real investment

1) I am not assuming you have 500k in cash. If you rather invest in the stockmarket 500k then buy a house for 500k and be rent free...be my guest. I wouldn't do that.

RentingForHalfTheCost says

So, on top of tying up your 500K you have 10K of annual expenses

10k of expenses? I have not had a single dollar in expenses other than improvements that I wanted to do. Didn't have to do it. What do you mean?
I have lived in this house like a renter...no issues and a home warranty for $600 that covers most common issues if they happen. $10k?? not realistic. I could get a brand new AC for that.

RentingForHalfTheCost says

You were the one that said "sell in 1 year".

What I meant was, what the salesprice would be, not that you actually sell it. Who buys a house and sells after one year? Wouldn't make any sense.

SubOink says

10k of expenses? I have not had a single dollar in expenses other than improvements that I wanted to do. Didn't have to do it. What do you mean?

You don't pay taxes, insurance? You think your housing structure is absolutely no maintenance? Please let us know how you can do that.

SubOink says

home warranty for $600 that covers most common issues if they happen.

That is like saying cars have no maintenance because you get it covered by the dealer for the first 50K. They still have it, you just have less risk when you buy something new. Just wait until you have a 10 to 15 year old home. Maintenance is a real problem with homes. Many people on this site will tell you. I rent a 45 year old home and have to call the landlord at least once every 3 months. I have seen the bills and they are running about 1-2% of the house price per year. Things like new hot water heater, new dishwasher, roof damage, fence damage, etc. etc. Shit happens.

SubOink says

1) I am not assuming you have 500k in cash. If you rather invest in the stockmarket 500k then buy a house for 500k and be rent free...be my guest. I wouldn't do that.

Then the numbers get even more complicated. If you don't have the 500K cash then you have to pay for an appraisal, title insurance, possible PMI, more costly house insurance, etc. And the worse cost of them all the interest on the loot itself. Remember, someone had to provide you with the 500K because you didn't have it in the first place. That doesn't come free, you are paying someone for that privilege. Sure, in todays market that is not bad because you can get loans in the 4% range, but for 500K that is still a lot. ~20K/year. Nothing, and I repeat nothing in life is free. You make it sound like you own that 500K when in fact you don't. You are renting money instead of a house. That is the main difference. I have decided to rent a house even though I don't need to rent anything. I have the cash to buy, but am growing my cash faster than house prices have been growing. And I am a very conservative investor. Very conservative.

If you are going to shoot down my simplified view of the picture trying to show that your over simplified view has holes, then please just start using the rent-vs-buy calculator on this site. I don't have the time to type up all the costs for each side here. Patrick did a great job and makes it easy for everyone. But stop posting your over simplified view of the rent-vs-buy equation. If after understanding the full financial picture people decide to buy then that is their decision. And there are valid reason to buy, even in todays market. They have very little to do with finances though. People should buy because they want a home for themselves and their families to call theirs, to give stability to their lives. If you keep saying it makes financial sense then I will keep saying you are wrong at this point in the BA. You won't be ruined, but you will potentially be hurt more than if you stayed a renter.

SubOink,

If you are seriously interested in understand the rent-vs-buy problem then I posted this in another thread, but can help you if you want. Read both articles and decide for yourself. The first is fear tactics with little data to support in my view. The second is done by a team of over educated people that are running the numbers and letting the data speak for itself. They argue both sides and have good point both ways. There is no one answer for everyone as you will see. There is one answer for me, because I know where I lie in the investor side. I can save without a mortgage.

------

Here is an opposing view from a SVP at NAR. I went right to the belly of the beast.

http://economistsoutlook.blogs.realtor.org/2011/06/08/rent-or-buy/

If you read carefully you will see the same arguments that many realtors use repeatedly. Compare this to the team of unbiased people who did some real analysis on the subject bringing in years of data and looking at all the parameters.

http://www.fma.org/NY/Papers/Lessons_from_30_years_of_Buy_vs_Rent_Decisions.pdf

You decide for yourself the integrity and biasing of each report.

drtor says

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

Where do you live (in general terms).

I personally do not see incomes rising to the extent that would support any increase in rents. I do see things like property taxes increasing and I'm guessing that landlords would be at least trying to pass those along to the consumer.

zzyzzx says

drtor says

In my apartment complex they are signing new leases at about 35% more than what I signed for 6 months ago...

Where do you live (in general terms).

If the homeowner isn't insulted by your offer...you didn't bid low enough!!!

So, I just sat on a plane that took me across the country. I paid $275 for that privilege because I was early to book and got a great deal. If I had asked around the plane during the flight what others paid, I bet some people paid double and more for the exact same service (not first class). That doesn't mean that the cost to fly is on the rise. Same situation applies here. Just because you have some local demand going on in your apt complex doesn't mean it is everywhere. It could be, but just saying you can't really say that with the data you are showing.