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Renting vs Buying
Posted on 2/2/09 at 2:00 pm
Posted on 2/2/09 at 2:00 pm
There seems to be a lot of demand on the Money Board for some more detailed analysis of this question, so I'd like to provide a link to a very detailed write-up that was done over at Seattle Bubble. Seattle Bubble is a blog run by a guy that I know who went from just a regular dude searching for a house to something of a real estate guru in the area. I believe this post was written by one of his contributing bloggers. Enjoy.
Seattle Bubble: Rent vs Purchase: a Comparison
Seattle Bubble: Rent vs Purchase: a Comparison
12
Posted on 2/3/09 at 10:20 am to Tiger JJ
The linked info is good from the standpoint of encouraging people to crunch the numbers before jumping into a major investment. While the blog touched on house appreciation scenarios, it didn’t really get into expected movement in rental rates.
Also, most consumers make the decision on the basis of owning a home for life style/enjoyment purposes versus buying a house for investment purposes. From the owning a home perspective, the life style/enjoyment factors could include the freedom to improve the property (e.g., renovate a kitchen), elimination of the uncertainty of having a landlord in the equation (e.g., selling the rental property), getting established in a good school district, and an overall greater sense of ownership in the community.
Also, most consumers make the decision on the basis of owning a home for life style/enjoyment purposes versus buying a house for investment purposes. From the owning a home perspective, the life style/enjoyment factors could include the freedom to improve the property (e.g., renovate a kitchen), elimination of the uncertainty of having a landlord in the equation (e.g., selling the rental property), getting established in a good school district, and an overall greater sense of ownership in the community.
Posted on 2/3/09 at 11:19 am to Tiger JJ
If you search the blog, there is plenty of commentary on rental rates. It focuses specifically on the scare tactics used for years by the industry about "hurry and buy before you are priced out. And rents will go sky high!". It's total bullshite and the rational predictions of rental DECREASES are coming true just as predicted. (BTW, that will mean prices will have to keep going down even more.)
I understand the non-economic value of homes, but I think they are vastly overstated. But even more relevant, they are massively overvalued. Is it really worth paying 2X rent to own in order to be able to plow more money into a kitchen?
What does "getting established" in a good school district mean? You still get the schools if you rent there.
I understand the non-economic value of homes, but I think they are vastly overstated. But even more relevant, they are massively overvalued. Is it really worth paying 2X rent to own in order to be able to plow more money into a kitchen?
What does "getting established" in a good school district mean? You still get the schools if you rent there.
Posted on 2/3/09 at 12:19 pm to Tiger JJ
In regard to rental rates, I’ll need to go back and review the info for consideration of likely rental rate movements. This would obviously be geo-specific based on supply, demand and other market factors.
When anyone could get a mortgage and buy a home, rental rates in many communities were soft. With stricter lending/mortgage requirements, demand will increase for rental units and rates may increase in some community.
I don’t recall if the author considered rent escalation. As many renters have experienced, all or part of the increases in the owner’s property taxes and insurance will normally be passed on to the renter.
While not mentioned in the blog, renters normally don’t avoid all maintenance costs. Also, from my observations, renters tend to incur higher moving expenses as their rental decisions tend to be more short-term.
Don’t underestimate the non-economic value of owning a home.
My school district comment relates to be getting situated for when the kids are ready for school (if you choose public education). You are right that you can rent and get the same. Although in my experience, great school district tend to be in heavily owner-occupied communities, and rentals come at a premium.
When anyone could get a mortgage and buy a home, rental rates in many communities were soft. With stricter lending/mortgage requirements, demand will increase for rental units and rates may increase in some community.
I don’t recall if the author considered rent escalation. As many renters have experienced, all or part of the increases in the owner’s property taxes and insurance will normally be passed on to the renter.
While not mentioned in the blog, renters normally don’t avoid all maintenance costs. Also, from my observations, renters tend to incur higher moving expenses as their rental decisions tend to be more short-term.
Don’t underestimate the non-economic value of owning a home.
My school district comment relates to be getting situated for when the kids are ready for school (if you choose public education). You are right that you can rent and get the same. Although in my experience, great school district tend to be in heavily owner-occupied communities, and rentals come at a premium.
Posted on 2/3/09 at 1:04 pm to Tiger JJ
Edge, I just think there's been a sea change in some of the areas of conventional wisdom that you are taking for granted.
Re rental rates, make no mistake about it - they are on the retreat. There is a MASSIVE inventory and shadow inventory of houses on the market by desperate owners trying to get just some kind of cash flow in the door. Just pull up Craigslist in any major metropolitan area and watch in real time the huge increase in rentals for offer. Then factor in the recession, and you start getting things like people consolidating their real estate consumption by moving back in with parents/friends/etc. Apartment rents are now getting hit too.
"I don’t recall if the author considered rent escalation. As many renters have experienced, all or part of the increases in the owner’s property taxes and insurance will normally be passed on to the renter. "
This is simply patently false in the current environment.
"While not mentioned in the blog, renters normally don’t avoid all maintenance costs. Also, from my observations, renters tend to incur higher moving expenses as their rental decisions tend to be more short-term. "
If I make a repair, I deduct it directly and immediately from my next rent check payable.
"Although in my experience, great school district tend to be in heavily owner-occupied communities, and rentals come at a premium. "
This is another bit of conventional wisdom that is basically blown to bits now.
Re rental rates, make no mistake about it - they are on the retreat. There is a MASSIVE inventory and shadow inventory of houses on the market by desperate owners trying to get just some kind of cash flow in the door. Just pull up Craigslist in any major metropolitan area and watch in real time the huge increase in rentals for offer. Then factor in the recession, and you start getting things like people consolidating their real estate consumption by moving back in with parents/friends/etc. Apartment rents are now getting hit too.
"I don’t recall if the author considered rent escalation. As many renters have experienced, all or part of the increases in the owner’s property taxes and insurance will normally be passed on to the renter. "
This is simply patently false in the current environment.
"While not mentioned in the blog, renters normally don’t avoid all maintenance costs. Also, from my observations, renters tend to incur higher moving expenses as their rental decisions tend to be more short-term. "
If I make a repair, I deduct it directly and immediately from my next rent check payable.
"Although in my experience, great school district tend to be in heavily owner-occupied communities, and rentals come at a premium. "
This is another bit of conventional wisdom that is basically blown to bits now.
Posted on 2/3/09 at 3:42 pm to Tiger JJ
Jersey, I agree with you on conventional wisdom. In other words, forget about conventional wisdom when you are making any major decision, including whether or not you should buy a house. As I said, one good thing about the blog is that it may encourage consumers to run the numbers and study the real estate market versus relying solely on what the real estate agents tell them.
As I also said, there would be geo-specific consideration relating to supply, demand and other market factors. I am aware of landlords passing on additional costs to renters in some areas (e.g., in the Chicago area). This could certainly be the case in most markets if you are running the numbers over a ten year period.
One costly mistake I have seen is that prospective home owners fall in love with a property and want it at any cost. Going into a purchase, you need to treat this, in my opinion, as a business transaction. Offer what you think is a good deal for you based on factors such as location, cost of renovations, what you can afford, the situation of the seller, the economy, available inventory, etc. If they don’t accept your offer, move on to the next property. By the way, you won’t be very popular with the real estate agents.
If you can’t find a great deal to buy and if non-economic factors are not very important to you, then find a good rental opportunity.
As I also said, there would be geo-specific consideration relating to supply, demand and other market factors. I am aware of landlords passing on additional costs to renters in some areas (e.g., in the Chicago area). This could certainly be the case in most markets if you are running the numbers over a ten year period.
One costly mistake I have seen is that prospective home owners fall in love with a property and want it at any cost. Going into a purchase, you need to treat this, in my opinion, as a business transaction. Offer what you think is a good deal for you based on factors such as location, cost of renovations, what you can afford, the situation of the seller, the economy, available inventory, etc. If they don’t accept your offer, move on to the next property. By the way, you won’t be very popular with the real estate agents.
If you can’t find a great deal to buy and if non-economic factors are not very important to you, then find a good rental opportunity.
Posted on 2/3/09 at 5:01 pm to Tiger JJ
Edge, you do make a great point about people simply taking the time to run the numbers. Too often for too many people, they've been railroaded into large financial transactions by peer pressure - often from family. It really pays to take a step back and think about what it really means to buy a house.
I personally believe that we will eventually return to a regime where the costs of renting and buying are more or less in line, it's just that we have a long way to go before we get there.
I personally believe that we will eventually return to a regime where the costs of renting and buying are more or less in line, it's just that we have a long way to go before we get there.
Posted on 2/3/09 at 5:56 pm to Tiger JJ
Jersey, good points. Thanks for your blogs.
Posted on 2/5/09 at 9:45 am to Tiger JJ
edge-
Regarding rental rates, right now, lots of professional land lords are in denial. I was talking to my landlord, and told him I wanted new window on one window in the place. He threatened to raise my rent. I threatened to move. I pointed out that there are 5 places for rent within one block of my house. Yes, some are more expensive but they are bigger and nicer. He elected not to raise the rent for the moment, but he is still deciding on the window.
It will take a hwile before rental rates start to decline in earnest b.c of landlords not getting it/leases. But by the end of the summer, when you have a large section of houses sitting on the market unsold, rental rates will take a dive. Or at least that is what I am guessing.
Regarding rental rates, right now, lots of professional land lords are in denial. I was talking to my landlord, and told him I wanted new window on one window in the place. He threatened to raise my rent. I threatened to move. I pointed out that there are 5 places for rent within one block of my house. Yes, some are more expensive but they are bigger and nicer. He elected not to raise the rent for the moment, but he is still deciding on the window.
It will take a hwile before rental rates start to decline in earnest b.c of landlords not getting it/leases. But by the end of the summer, when you have a large section of houses sitting on the market unsold, rental rates will take a dive. Or at least that is what I am guessing.
Posted on 2/5/09 at 6:19 pm to Tiger JJ
MileHigh,
Last time I looked at the rents in the CPI, they were flat to slighly up. I agree that this summer may be a good point to determine the future of rents.
I don't know where we will be over the next few months. The fact that fewer people may qualify or have the downpayment to buy a home will tend to increase the demand for rental units and could push rents up. Offsetting this will be lower interest rates and other incentives in the Recovery Plan to buy homes. Again, this will be geo-specific. What happens within communities in CA, FL, AZ and NV will likely be different from other part of the country.
Last time I looked at the rents in the CPI, they were flat to slighly up. I agree that this summer may be a good point to determine the future of rents.
I don't know where we will be over the next few months. The fact that fewer people may qualify or have the downpayment to buy a home will tend to increase the demand for rental units and could push rents up. Offsetting this will be lower interest rates and other incentives in the Recovery Plan to buy homes. Again, this will be geo-specific. What happens within communities in CA, FL, AZ and NV will likely be different from other part of the country.
Posted on 2/6/09 at 8:40 am to Tiger JJ
Edge-
Actually per the BLS, rents are decreasing. LINK
OER may not be the best measure though.
I do think there will be additional demand for rental units from former homeowners. The question is whether this will offset the increase in supply and people doubling up. People who can't sell will try to rent, and there is a huge amount of inventory available.
My landlord is fixing my window. Turns out he has 4 vacant properties. he was just being a dickweed. His comment about raising rent was just a bluff, I guess.
Only time will tell, but my bet is rents stay flat to possible mild decline.
Actually per the BLS, rents are decreasing. LINK
OER may not be the best measure though.
I do think there will be additional demand for rental units from former homeowners. The question is whether this will offset the increase in supply and people doubling up. People who can't sell will try to rent, and there is a huge amount of inventory available.
My landlord is fixing my window. Turns out he has 4 vacant properties. he was just being a dickweed. His comment about raising rent was just a bluff, I guess.
Only time will tell, but my bet is rents stay flat to possible mild decline.
Posted on 2/9/09 at 8:39 am to Tiger JJ
does the $15,000 tax credit affect your thoughts on renting vs buying?
Posted on 2/10/09 at 7:33 pm to Tiger JJ
No
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