patrick.net

20 seems awfully high, it implies interest+taxes amount to 5% or less.

Given the interest rates are around 5.25% or so right now and taxes are usually in the 1-2.5% range, that implies 'renting' a house by owning/paying a mortgage costs you 6.25-8% a year. 100/6.25-8= 12.5-16.

There's deductions with owning, but you lose the standard deduction. Also, there is a shit ton of upfront costs with owning, such as closing costs, realtor fees, the down payment (while you get this back when you sell, it does make you less liquid and you lose opportunity to invest elsewhere), insurance costs, and maintenance.

The calculator they use on that page is really really bad and ignores almost all of these factors. They don't even have an option for property tax rate.

This is a much better calculator http://www.nytimes.com/interactive/business/buy-rent-calculator.html

Given home prices are going down as well as rent prices, I think leaving expected house appreciation/rent appreciation at 0% is fair for the next 3-5 years.

In general, the longer you stay put, it's better to own. As far as the ratio, it should generally be closer to (100/(5.5+prop tax rate), so 12-16 depending on the taxes of where you live.

Well, this prices me way out of the market in most of the country then. Oh well... Anything over 175k would cost more than renting for me given this formula.

A good way to think of that number is "the number of years of rent it would take to pay off the house, if ALL the rent went towards purchase price". Then you clearly see that lower is better.

This number is sometimes called GRM, but it's confusing, because some people use annual rent (20), and some use monthly rent (240).

Personally, I agree that 20 is too high. 20 corresponds to a 5% rent/price ratio. I say break even is more like 6%, which corresponds to 16.7. And even then, it's not clear that buying is better.

The GRM is just the inverse of the gross return percentage.

SF ace, your question depends on whether you're talking about a ratio of 25 making sense in terms of logic/good investment or personal preference. If AAPL has a P/E of 2000 when it should have a PE of 200, it doesn't matter if you make $7/hr or are W. Buffett, it's not a good investment. If you just want to buy AAPL because you're a cocky rich guy and want to tell your friends or post on blogs that you bought AAPL for a ridiculous price, then it makes perfect sense.

sf ace: appl is growing its income stream. Unless you can give a good reason why one property will see its income stream (equivalent rent) increase faster than the other, your comparison is silly.

To camping's point - rent vs own has some preference aspect, whereas buying Apple vs Dell stock usually doesn't. Stock purchases are generally purely financial decisions.

So, SF Ace, for someone who doesn't care about rent vs own, even at 4% of income, with a ratio at 25, renting is better than owning. (at least in the short-medium term).
But, someone who prefers owning (let's say he doesn't like moving and wants to fix it up just so), at 4% of income it may make sense to own even though it costs more.
conversely, someone who prefers renting (likes the flexibility to move frequently) might rent even if the own/rent ratio is 10.

There's non financial aspects to life! Purely for transportation, it makes no sense to buy a Mercedes over a Honda. But many people enjoy the Mercedes and are willing to pay more.

Sometimes these housing blogs posters forget this. Owners calling renters "rentards", renters saying that buying is always stupid in SF because of the own/rent ratio. Sometimes people will do something for non-financial reasons. It's ok if they can afford it. (which unfortunately sometimes is not the case!)

SF ace, if the point of all of that was to say that the rent ratio of Lafayette should be higher than Concord, I don't disagree with you.

That's not what you said previously:
"You can say a ratio of 12 makes sense. But what if I tell you that my housing cost is less than 4% net of income tax, would a ratio of 25 make sense? Nothing is set in stone and appears as it seem."

Basically, if you have the money, it doesn't matter what the ratio is. That's correct in terms of your personal choice, but it doesn't make sense financially.

Again, if your point is that Lafeyette should be a ratio of 25 for a fair value and Concord should be a 12, that may be true. It would probably be best to look at some historical values of the rent ratio. 10 years ago was Lafeyette's rent ratio 25? If the ratio was 12, 10 years ago, then there needs to be some justification why 25 is the new proper ratio.

I believe it's the same thing camping.

SF ace was pointing out that housing costs have premiums based on where they are (location). Based on that premium you would decide if the ratio made sense to rent/buy for that area based on your own perspective for that location. The ratio might be out of wack for some, while completely acceptable for others in another location.

I'm guessing that most people here have a decent understand of their expenses, what is out there, where the market is heading and multitude of other factors, that many others don't have.

The ratio for everyone is somewhat subjective. The ratio for us is somewhat useless. The ratio for others maybe provide them with some ideas, and whether they're entering bubble territory or not. It's a semi useful number, but definitely not something hard fast to use. And definitely subjective to the earnings / location of each person.

So according to you guys, there was no housing bubble if you could afford it. If you bought in Brentwood in 2007 for $1M and you make $350k a year, but now your neighbor just bought a very similar house for $450k, it wasn't a bad financial decision?

You seem to be getting further and further from the point of the original article. Now, you're down to safe areas, good schools, etc. are better than crappy areas...yeah, I know...and puppies are cute.

If you are in the same neighborhood and can rent for a lot less than buying, where is the logic in buying if you take out the emotional aspects? And where is the historical justification for these "premiums." Like I asked previously, 10 years ago, did you have a rent ratio of 25 in X-premium area or was it closer to 15? If it was 25, then end of story, you're probably right, it just has a premium. If the premium was a lot less pre-bubble, then it makes sense to rent in that area, unless you are concerned about hyperinflation or something else dramatic.

SF ace says

Delta 356 yeah it’s more expensive than renting but $356.

I'm obviously not in the same league as you, because $356/mo. is a lot of money to me...

Income tax Deduction (1.430)
Glad to see you've moved down a couple of tax brackets. Also, sure you're not into AMT? Property tax deductions would be disallowed.

SFAce, You left out realtor commissions, mortgage closing costs, as well as opportunity cost for having to put a lot of money down.
If you can rent at $2500, I don't see buying being profitable unless the house is under $425k (at which point, property taxes start coming into play). Neither does the NyTimes
http://www.nytimes.com/interactive/business/buy-rent-calculator.html
$900k vs. $2500 rent shows buying is NEVER better than renting, assuming stable prices.
Assuming stable housing prices (which, at that price, it won't be, it'll go down), rent would have to increase 23% a year for it to be a good buy, and then you'd only make your money back after 9 years.
Tell the Japanese about inflation/economic upturn....they're still waiting after 20 years.
SF ace says

“If you are in the same neighborhood and can rent for a lot less than buying, where is the logic in buying if you take out the emotional aspects? ”
Renting is not a lot less than buying, not anymore, this is 2010, not 2007.
Buy: 900K Mortgage 720K
Rent: 2,500
Interest 5.25% (conforming jumbo prime)
% Down 20%
Interest: 3,150
Property tax: 937
Income tax Deduction (1.430)
Carrying cost before 2,656
Insurance maintence 200
Total Carrying Cost 2,856
Rent 2,500
Delta 356 yeah it’s more expensive than renting but $356.
In all honesty, this may be as good as it gets in Lafayette. I would not call this scenerio a mistake. Of course, Concord will look way better in comparision but no reasonable person that makes 200K+ wants to buy/live there.
Then there is the concept of risks vs. reward, if rent and house price don’t go up, it is going to cost thousands a year, its gonna suck and money down the drain, true, one economic upturn/inflation cycle, those numbers will flip exponentially in favor or buying. You see that 356 as unneccessary cost, I see that as insurance and opportunity.
This chart summarizes why affordability has never been better.
http://www.nahb.org/fileUpload_details.aspx?contentID=34325

EBGuy says

Income tax Deduction (1.430)

Glad to see you’ve moved down a couple of tax brackets. Also, sure you’re not into AMT? Property tax deductions would be disallowed.

Wait for the deficit issue to linger. If Obama/Democrats get a round II, those mortgage/property deductions are going to go bye bye (or at least greatly reduced),

Also, you should assume 5.25% interest on the whole $900k, not the part without the down payment. Otherwise, you can act like you put down $800k and all of the sudden, you only have to pay interest on the $100k left and it's suddenly magically affordable to buy a $900k house instead of renting at $2500 since the carrying costs are so much lower...oh you just need to come up with $800k down.

By assuming the interest rate on the whole house, you take into account opportunity cost of being able to invest the $180k (or just have around as cash and not gambled as equity into an overpriced house).

If anything, the $180k part should have a higher discount rate than 5.25%. Though money markets aren't paying shit these days, that's a lot of money for most people to put into a relatively illiquid investment that's way overpriced (at least in my opinion)

SF ace says

“If you are in the same neighborhood and can rent for a lot less than buying, where is the logic in buying if you take out the emotional aspects? ”
Renting is not a lot less than buying, not anymore, this is 2010, not 2007.
Buy: 900K Mortgage 720K

Rent: 2,500
Interest 5.25% (conforming jumbo prime)

% Down 20%
Interest: 3,150

Property tax: 937

Income tax Deduction (1.430)

Carrying cost before 2,656

Insurance maintence 200

Total Carrying Cost 2,856

Rent 2,500

Delta 356 yeah it’s more expensive than renting but $356.
In all honesty, this may be as good as it gets in Lafayette. I would not call this scenerio a mistake. Of course, Concord will look way better in comparision but no reasonable person that makes 200K+ wants to buy/live there.
Then there is the concept of risks vs. reward, if rent and house price don’t go up, it is going to cost thousands a year, its gonna suck and money down the drain, true, one economic upturn/inflation cycle, those numbers will flip exponentially in favor or buying. You see that 356 as unneccessary cost, I see that as insurance and opportunity.
This chart summarizes why affordability has never been better.
http://www.nahb.org/fileUpload_details.aspx?contentID=34325

First of all, your calculations are wrong. Use the NYTimes calculator. At 4% increase for house and 3% increase in rent, you need to live in your house for 20 years for buying to be better. And That's some pretty damn optimistic assumptions. Even 3%/3% and you're better off renting forever.
As for times when home prices did not go up in value, ask the Japanese about their experience in the past 20 years.
Times now are different. Name me a 10 year interval where lending standards have deteriorated to the point they did in the 21st century? Where people were getting houses with little or no down payments?
Name me a 10 year period where government expenditures as related to GDP were 40% or higher in peacetime?
Things change. If you assume another sucker will buy your house at a higher price, which is what you are doing with the 4% house appreciation assumption, then you can take the levels to inifiniti. $2500 rent versus $1.7 million, with assumption your house will increase by 7% a year and rent by 2% and it makes sense to buy even after living for 5 years. The key here is assuming prices will magically go up by 7%, because when you do that, the 7% is higher than the interest/taxes you pay on the house, so are essentially living for free off of price appreciation.
The reason house prices go up is because rents go up (that is how a house makes money, by 'rent'). The reason rents go up is because land prices go up.
Rents aren't going up right now. Whether or not land will go up remains to be seen.
At $900k, you have $500k downside on the purchase price of your home based on the fundamentals of rents right now. This is is if the house goes back to its rent 'fundamentals' and stops assuming there'll be another sucker to buy your house at a higher price.

Ptipking222 and camping definitely have a point, that in the short to mid term renting will be cheaper than owning (in Lafayette and similar areas).

Over 30 years though, we'll probably have some inflationary period. Plus, part of the calculation showing that renting is better includes the opportunity cost of the down payment. If house prices are flat for 30 years, it's likely that the economy is bad for 30 years. So the opportunity cost of not investing that down payment is not that great either.

So then there's other considerations. Is it worth $356 per month (by SF Ace's calculation) to know that the LL is not going to get foreclosed and force me out. (check out the threads on this and other boards about this topic.) For some people, it's worth it, for some people, it's not. Maybe it's even worth it financially, in the sense that the forced move is going to distract me from my job and cost my earnings. A stretch but I can see situations where this would happen.

In Fortress areas, there's enough people who find this premium worth it. But for those who value the flexibility of renting, it's an awesome deal to rent in Fortress areas.