Is it Better to Buy or Rent?

Came across this nice calculator at the NY Times that lets you fill in a number of parameters to help make decisions about renting or buying. While prices are out of whack compared to income you are better off renting and investing the difference (if you have anything left over each month) rather than buying. With prices dropping, inventory rising, and more and more loans resetting into the middle of next year that might change. As prices come down to realistic levels over the next few years it might not be a bad time to think about buying. This calculator can help you make a decision based on your particular situation.

Is It Better to Buy or Rent?

6 Replies to “Is it Better to Buy or Rent?”

  1. Neat little calculator.

    You also have to factor in interest payment deductions on your taxes.

    Right now seems like a good time to wait, but timing the housing market is difficult. The most important thing is that when you do buy a house, it’s something you can afford. You have to be able to ride out the ups and downs.

    If you buy and the market starts to go down, you have to be able to wait for it to go back up, or you have to stay there long enough that you can cover the loan when you sell the house. People that got ARMs and want to move can’t because their loan balance is more than their house is worth (if it’s gone down in value significantly).

    If you buy and the market goes up, I think it’s less eventful. It’s nice knowing the value of your home is increasing, but unless you plan on moving to a different region, every other home around you is also increasing in value. The gains you make on the increasing house value are diminished because everything you want to move into has also gone up in value.

    Anyways, it’s important that people make choices that will make them happy. While buying a house might make you happy, being strapped for cash because 90% of your paycheck goes to the mortgage will not make you happy. If that means you rent something, then big deal, you rent something. The titles “rent” and “own” shouldn’t mean more than your happiness.

  2. Being able to afford a house doesn’t matter…
    All you had to do was LIE you make a million dollars then you could buy a house in Downey.

    Of course then you were to add fake columns and tall *bronze* entry gates to make your house appear like a mansion.

    Oh you couldn’t afford to make the payments anymore? Don’t worry Uncle Sam will bail you out!

    That pisses me off the most.

    I didn’t take a liar loan and when we were getting married it felt like the wrong time to buy a house with rising prices, unrealistic demand and unrealistic home values due to morons just paying whatever price because they had to buy and could *magically* afford it.

    I also didn’t want to get into a condo which doesn’t hold value well (no land), I’m opposed to the usually ridiculous association fees and what they don’t do with them and especially when it looked as if the bubble was about to burst.

    The negative reasons mentioned above along with having the freedom to move if you don’t like your neighbors (likely in SoCal) or the area you’re in is getting worse… made it not a big deal to me that I rent. Happiness is the most important thing and soaking all of my income into a loan wouldn’t make me much happier.

    Eventually (maybe a year or two) things will start to calm down a bit with real estate and hopefully by then the lenders are held to more stricter lending standards then maybe buying a house would be more feasible.

  3. The calculator deducts the tax deductions from operating costs (property taxes, maintenance, etc…) so it should be giving a pretty accurate picture. In several scenarios for me, the resulting graph had a -x^2 shape to it. After 5-10 years it would be better to buy, but then after about 20 years it would be better to rent. Compounding on your investments would eventually surpass any reasonable gains on a home (and that’s not considering a Roth IRA where your money could grow tax free). That’s why I’ll never consider a primary residence an investment.

    The other thing I found funny was that the more money you put down on a house the better it is to rent (thanks to compounding again).

    The loan situation was actually worse than people overstating their income. They were giving out loans with ZERO income documentation which should be a crime.

    Bailouts with taxpayer dollars still hasn’t become a reality. The Senate passed a bill to spend $100 million on credit councilors, but tax dollars aren’t flowing yet. Right now the lenders and investors who bought up the bundled mortgage securities are taking the brunt of the damage. There’s a lot of calls for action in Washington so I’m not completely confident that tax dollars are safe.

  4. “Being able to afford a house doesn’t matter…”

    I meant for those of us trying to make wise financial decisions.

    I’m still not sure about the interest payment deductions. The operating costs make it more expensive to own a home, not less. The operating costs are also pretty high. At .46% it says my home insurance should be about $1800 a year, but it’s only $600 including earthquake, and the renovation/maintenance costs are a little high too. It says I should have about $3600 in expenses each year between maintenance and renovation, but we haven’t had anything that high. A new water heater was $400, termite work was $400…but that’s it in 2.5 years. That’s an overestimate of like $10,000. And unless you live in an apartment, the additional utilities should be zero, not $100.

    Anyways, that’s not to say the calculator is bad, just trying to get a more accurate estimate for myself. According to the calculator, with all the numbers as close as I can get them, at 0% home appreciation it’s better for me to buy after 4 years. That’s using a home rental value of $2300, which is what a guy at work pays for a 3 bed 2 bath house in town.

    As for not liking Condos…the places on our street haven’t dropped in price at all. They’ve steadied, but they haven’t done what the overpriced houses around us have done. Probably because they’re still a better deal than a house.

  5. All those numbers are adjustable so put in what fits you best. To even give the house an edge I put all the maintenance costs at 0. I was using $1400 rent and a $450k house price.

  6. What a catchy question! I guess, I prefer to choose to buy rather than to rent so that you can have and do of your own…What you think would be?

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