Renting Versus Buying, Re-examined

During the height of the bubble, most of the savvy housing watchers were urging their readers to rent, arguing (correctly, in hindsight) that buying a home was far less economical than renting. Fast forward a few years, where housing prices have fallen by more than 30% in some areas, mortgage rates are still near record lows and the government is writing checks for $8,000 to encourage home-buying; as a result, the math is much less clear-cut. In short, it’s probably time to re-examine the choice that exists that exists between renting and buying.

Unsurprisingly, the relationship between rent rates and housing prices is highly regional. According to an analysis by the New York Times, “In South Florida, Phoenix and Las Vegas, house prices — relative to rents — are as low as in places that never experienced a bubble, like Indianapolis and St. Louis. But in a handful of other areas, including San Francisco, Seattle and Portland, Ore., house prices remain significantly higher than they were before the bubble began.” The author concludes that while the former cities offer some great bargains, buying property in these latter markets makes zero financial sense.

Without listing every market and which way the corresponding calculation is currently tilting, it probably makes sense for you to run the numbers yourself. Generally speaking, there are a handful of factors that need to be taken into account. In terms of buying, the purchasing costs, annual costs, lost opportunity costs, and selling costs, need to be weighed against the expected home-price appreciation. In terms of renting, these same costs should likewise be weighed against the expected rent price appreciation. Then, the economy of renting should be compared against the economy of buying.

If this kind of calculation sounds daunting, don’t worry! The New York Times Rent/Buy calculator has done all of the hard work for you, with 7 basic inputs (and 16 additional advanced inputs). After crunching the numbers, it will determine whether buying is more economical than renting, and if so, how many years you will have to remain in your home before this is the case. It will also compute your cumulative savings, and display this in graphical form against the number of years that you expect to live in your home after buying it.

In the end, the biggest variables are home price and rental price inflation, and unfortunately, no one can accurately predict how these will change. Thus, it’s probably wise to be conservative when estimating these variables, and assuming that they will be somewhat similar. As for most of the other inputs, setting them should be within your control or fairly easy to predict.

If you’re feeling lazy and/or don’t place a lot of stock in overly complex complications, you can do a back-of-the-envelope rent ratio calculation, by dividing the purchase price for a house that you are looking at by the annual cost of renting a similar one. According to experts, “When you do the math, you discover that a ratio above 20 means you should at least consider renting, especially if you may move again in the next five years or so. When the ratio is well below 20, the case for buying becomes a lot stronger.”