Buy vs rent datapoint of the day

By Felix Salmon
July 29, 2009
Alex Veiga has lots of good datapoints on renting vs buying across the country. The main result is that buying is still more expensive than renting, but that the gap is narrowing sharply:


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Alex Veiga has lots of good datapoints on renting vs buying across the country. The main result is that buying is still more expensive than renting, but that the gap is narrowing sharply:

An Associated Press analysis of 45 metro areas finds the gap between the monthly mortgage payment on a median-priced home and the median rent has shrunk from $777 a month to just $221 in the past three years.

My feeling is that the gap is going to continue to narrow, until it becomes negative. And then I’m not sure what happens: if a large number of renters start buying, that of necessity is going to mean rents falling further.
But already, for the right people in the right place, some sales work out significantly cheaper than renting:

Jere Ross, an Air Force vehicle operator, and his wife recently bought a four-bedroom, 1 1/2-bath house in Zephyrhills, Fla., a Tampa suburb, for $86,500 rather than jump into another yearlong apartment lease.

Ross, 23, used a Veterans Administration loan, which doesn’t require a down payment, and got a 30-year mortgage at a fixed rate of 5.5 percent. His monthly payment comes to $700 a month, including property taxes and insurance — $110 less than he paid to rent an apartment nearly half the size.

The most interesting news from a blogger perspective, however, is that Dean Baker, one of the earliest and most vehement housing bears, has just shelled out $650,000 on a 5-bedroom house. Sounds like a good deal to me, but then again I live in Manhattan.

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Comments
13 comments so far

Any information on the location of the Dean Baker home? I agree this is probably a very good price for nearly any home in the DC area, but as a recent buyer myself there is a big difference between the core city area and the outlying suburbs.

Also, I’m not really sure how your logic applies in the Washington, DC case. Let’s assume Baker is paying $4000/month on his mortgage. I’m pretty sure he could rent something fairly comparable for less. http://www.rentals.com/Home-Rentals/Disp lay.aspx?ListingNumber=945513.

Trust me, while I bought my house with the intent to never move, I worry that a whole host of things could happen to devalue it. I realize that mortgage/rent ratios can give a crude measure of how out of whack prices are, but sometimes they are not always comparable. Do I worry that the glut of condos in DC will eventually bring down rents? Yes. Do I think that housing prices will in turn be affected? Maybe, but the neighborhoods with condos are not really in the same market as my house, so I worry about it on a discounted macro level rather than at the micro level.

Anyway, your Florida example is a slam dunk example (especially one you add in the mortgage interest deduction), but in more ‘normal’ cases, I’m not really sure how can know what a reasonable monthly mortgage-to rent ratio is.

Posted by chappy | Report as abusive

Felix, if a large number of renters start to buy, it won’t necessarily mean rents will fall further. A lot of homes are being rented because there are no buyers for them, so if the homes that are bought are rental properties being taken off the market, it may have no impact on rentals, or might even drive rents up.

Buying is only more expensive than renting if you are going to swap homes regularly, like you can easily do when renting. If you are actually going to own a home for 30 years, vs. renting for the same time, I don’t see how renting could be less expensive, as it will rise with inflation, while the price of owning is fixed. All of the costs of owning a home (capital, maintenance, taxes) are factored into the cost of renting, but rent also includes landlord profit.

Posted by KenG | Report as abusive

KenG: The landlord could have lower capital costs, benefit from economies of scale with regards to maintenance costs, and may even face lower taxes depending on how the corporation is set up.

Not to mention that this calculation discounts the vale of your time with regards to maintenance costs.

Posted by Eagle | Report as abusive

The price of owning is not fixed. Taxes, maintenance, insurance, and sundry other costs associated with owning generally increase over time.

The volatility of ownership costs, in fact, is one of the reasons why a renter can predict his monthly living expenses with more accuracy than can an owner.

Landlords charge for maintenance, and they charge a lot. Almost every large business will charge a lot more than the hourly rate for a professional service than the service provider is actually paid. If I hire a plumber, he may charge me $55 per hour, but if a big company hires a plumber, they will be me $95 per hour, to cover their overhead, even though they may get the service for $45 per hour. This idea that large landlords have economies of scale that they pass on to their tenants is a myth, as they use every opportunity to add fees. And not everybody rents from giant companies, there are lots of individuals who rent out houses and condos, or who own small apartment buildings.

I have been a homeowner for the last 12 years, and there is no question maintenance is a neverending expense. But when I was renting, rent increases were a way of life. And in California, where I live, property taxes don’t increase unless you trade up.

You two guys (Eagle and Dave) ignore the fact that landlords add a profit margin that will exceed any cost savings, if there are any.

Posted by KenG | Report as abusive

KenG:

You assume that the landlord can get a rent which covers his expenses and gives him a profit.

This is true in some real estate markets and not so much in others. Blanket statements such as yours are of little utility when discussing something as general as “real estate.:

Dave, are you saying that renting will be cheaper than buying because landlords are willing to lose money?

I don’t think anyone would expect that buying or renting is always better, but that on average, one will be better than the other for a given condition (the condition I provided was buying a home and staying in it for a long time, and that will usually, not always, be less expensive than renting).

As far as blanket statements go, if none are allowed, then we shouldn’t be discussing a rent vs. buy decision, because it will often depend on whether it is a renter/landlord market or a buyer/seller market. Which is to say “it depends”.

Posted by KenG | Report as abusive

Unless price-to-rent ratios (or gross rent multiple or whatever you want to call it) fall back down to 10 to 12, then renting will always be cheaper than owning over a long horizon.

If the price-to-rent ratio is 20, then a $500,000 house will only command $2083.33 per month in rent. The mortgage on a $500,000 house is going to be something like $2997.75 per month (30 years at 6%), plus $520.83 per month for property taxes (1.25% in my city), plus hundred per month in insurance and hundreds more in upkeep.

If you bought a property at a sane valuation 25 years ago, then you can continue to collect your rent and make a return on investment. But people who try to buy right now are paying so much that their return on investment might very well be negative for 30 years.

In those intervening 30 years, the renter’s stock portfolio will have grown so much that he could buy 10 houses in cash versus the homeowner who now has 1 house. (This is if the renter can be disciplined enough to save all the extra money he’d have by not buying a house.)

Posted by Greg | Report as abusive

You must also consider that if you decide not to purchase the property you have been renting, the seller will get to keep the rent premium you paid to them. The seller would also keep the option fee you paid when you signed the contract. While it is considered a loss to you, it does allow you to the privilege of living in the home during the “option to buy” period. This period of time is usually three years or less and gives the buyer a chance to build up their down payment.

http://betterblog.ning.com/profiles/blog s/buying-home-to-rent

The lack of confidence in the real estate market is the key issue in this matter. So long as the overall outlook of owning real estate is unappealing to the common buyer, the margin between renting vs buying will continue to narrow. However, rents are also on the decline, spurred by high unemployment and falling real estate values. The last time this ratio was inverted was at the peak of no money down, negatively amortizing loans. So long as these types of loans are not available, I expect the ratio not to go negative. Interest rates are at lows yet the lack pay interest only loans is still keeping the price of renting lower then the price of buying. This is especially true for the low down payment buyers.

http://www.azrentalhomes.com

Posted by AZRentalHomes | Report as abusive

I have both bought and rented before. I think renting can be great if you have good landlords. We had our furnace go out and our landlords fixed it. It would have been pricey to do on our own. I know that not all landlords will do that, so be careful!

Posted by lylaburns123 | Report as abusive

I have both bought and rented before. I think renting can be great if you have good landlords. We had our furnace go out and our landlords fixed it. http://www.ultimateairinc.com It would have been pricey to do on our own. I know that not all landlords will do that, so be careful!

Posted by lylaburns123 | Report as abusive

This is an excellent article if you’re in Dallas. Apartment finders are fantastic, especially if you know what you want.

Posted by strakedavis | Report as abusive
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