I'm Brett Slatkin and this is where I write about programming and related topics. Check out my favorite posts if you're new to this site. You can also contact me here or view my projects.

01 January 2010

Rent vs. Buy -- My takeaways

NY Times' rent vs. buy housing widget is great. It accounts for the opportunity cost of investing in a house over something more predictable (e.g., bonds). Recently they're saying that this is the bottom of the US real-estate market. Shrug.

These are scenarios I consider realistic to explore potential home ownership. They are in San Francisco and only apply to the metropolitan condition. Inflation and rent increases are pegged at 2% and they use a rent/price ratio of ~24: $4k/month for rent, house of ~$1.2M (the outcome is the same for different rent/price values, only the ratio matters).
1. Houses appreciate at 4%, investment at 2%: houses win at 5 years.


2. Houses appreciate at 3%, investment at 2%: houses win at 8 years.


3. Houses and investment appreciate at 3%: houses win at 10 years.


4. Houses appreciate at 2%, investment at 3%: houses win at 23 years.


5. Houses appreciate at 2%, investment at 4%: houses never win.



My takeaways:
  • Tolerance for inertia: In favorable conditions a house could be cheaper after ~8 years. How much inertia do I want to have in a city? Would I be happy to wait 8 years to recoup costs? What if the market tanks like it has? Maybe I'd need 16 years?
  • Quality of life: These graphs do not account for personal time spent on managing a house. How much do I like maintenance and refrigerator shopping? How much of my personal time would be preserved by renting?
  • Financial risk: Investing in a house would greatly reduce other savings contributions. Would a house limit me in other financial crises (personal or otherwise)? Is financial agility important?
  • Deserving interest: Who would collect the interest (~50% of sale price) if I buy a house? The bank. Who gets that chunk if I rent? The building owner, presumably a member of my community. Where would I rather have the money go?

The Boomers are the most vocal about the bottom (in op-ed pieces, major news media, conversation, etc). I think things are different than they were in the 1970s when they were building a family. Home ownership is more complex, especially in cities.

The numbers don't add up-- am I wrong?

(all photos copyright NYT)
© 2009-2016 Brett Slatkin