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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)
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