Finally a rent or buy comparison that is not totally dishonest

Friday, September 7th, 2012 By

Manure

Usually, the standard “rent or buy” comparison is a big load of manure, but every once in a while, one comes out that is this side of realistic. Photo Credit: Ian Paterson/Wikimedia Commons/CC-BY-SA

Every now and again, some people will notice an article on some website somewhere about a “rent or buy” showdown. Usually, it’s a crock of manure, as much of the media appears to have been bought off by the financial industry, but occasionally, someone gets it rights.

Yet another lame “rent or buy” post

Many might have noticed the glut of “rent or buy” articles on business news sites. Most of the time, it’s sourced from material that is generated in a particular area just below a bull’s tail, if one gets the drift.

Usually, things like closing costs, insurance, taxes, maintenance and the higher cost of utilities in houses compared to apartments, aren’t factored in. Many of these comparisons also leave out the fact that most people don’t stay in one home for a whole decade, let alone long enough to pay off a 15- or 30-year mortgage. Every now and again, an honest one will come out.

Sometimes they are right

CNN Money recently posted an article titled “Buy or Rent? 10 Major Cities,” which purports to show the “break-even point” in 10 large cities with astronomically high rent. Real estate website Zillow.com has calculated said point based on average rent and average home price and factored in cost of maintenance, property taxes, closing costs, costs of utilities, and so forth, which the company calls the “break even horizon,” according to its blog.

For instance, in the 10 cities in CNN’s article, one where it’s recommended a person buy is Chicago. Median home price is $209,300, median rent is $1,430 and the break-even horizon is 2.8 years. In other words, after roughly 34 mortgage payments, buying is better than renting.

It actually does make sense. Assuming median home value in Chicago and the average rate of 3.55 percent APR for a 30-year fixed mortgage, the recent average according to the Washington Post, the monthly payment is only $945.70, using Bankrate’s mortgage calculator. The typical closing costs on a $200,000 home, according to Kiplinger, is about $4,070, which, with a monthly savings of about $484, is recouped in 9.5 months, though naturally before taxes, insurance and so forth. In other words, mathematically, they are on to something.

But sometimes they are wrong

Many rent or buy comparisons, as Zillow points out, use what’s called the price-to-rent ratio, or in other words, the ratio of price to annual rent. Anyone suggesting the price-to-rent ratio as a serious rubric should probably have their head examined; other costs of homeownership, such as closing costs, taxes, insurance, higher cost of utilities and so forth, are too large to ignore.

However, there are some resources for a more serious assessment. The New York Times has a “rent or buy” calculator where an interested person can punch in all the numbers and get a bit more realistic assessment.

Sources

CNN

Zillow

Kiplinger

Bankrate: http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx?MSA=7840

Washington Post: http://www.washingtonpost.com/politics/average-us-rate-on-30-year-fixed-rate-mortgage-slips-to-355-pct-15-year-steady-at-286-pct/2012/09/06/bcce901e-f82b-11e1-a93b-7185e3f88849_story.html

New York Times: http://www.nytimes.com/interactive/business/buy-rent-calculator.html

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