Over the years, I’ve tried to create a proper “rent versus buy” spreadsheet. First thing I noticed is that you can’t even attempt to do a straight line (assume everything is the same) over time calculation. Because the real world doesn’t come close to that. Second thing I noticed is that risk has to be taken into account, because in this case (homeownership), risk will cost you actual money out of your pocket. Third thing is that location, location, location is really true, the assumptions of what will happen over 20, 30, or 40 years almost all depends on location (Boston did great, Detroit didn’t, etc). Fourth, expenses, especially homeownership expenses, are a lot more variable that one would typically expect. Fifth, there are particular expenses (and hassles) that come with homeownership that rarely come with renting. When you rent and you want to “upgrade”, you usually plan a move, and move to a nicer place, and pay more rent. When you own, you usually do renovations, and those are expensive and disruptive. We’ve done renovations 3 times over the years, for the big renovation, my wife and kids moved out for 3 months, while I stayed in the mess to supervise the work as best as possible. I cooked all my meals for over 3 months straight on an outdoor grill.
Add all that stuff together and it’s pretty much impossible to make such a spreadsheet. Oh, you could make a trivial spreadsheet, but it won’t really be meaningful.
As an example of “risk”, especially for @WendyBG who mentioned “work” earlier. When you work, probably 30 or 40 years of your homeownership period, you have a risk that you will have to move. And moving, selling a home, buying another home, etc costs quite a lot of money. And that’s real money that comes out of your pocket from the proceeds of selling your previous home. When calculating returns over 30 or 40 years, you need to take that into account. I think I’ve read that the average person moves every 7 or 8 years. That’s 4 or 5 moves over a full career, and the expenses of those moves subtracted from the return! The expenses of investing in an S&P500 index fund are much lower, and moving doesn’t change them at all.
In the end, I gave up. The spreadsheet I had created was essentially worthless, and almost everything has to be based on some assumption (that didn’t hold true for all cases anyway). I once tried to tally up all the cash flows for each case over 40 years and then calculate a true IRR, but that also was full of rampant assumptions (like when do you replace the roof and how much does it cost, when do you refinance, how much did a sale/buy when switching a house really cost, what if you finance those costs, ho much did rent really go up? Did you rent something exactly comparable or were you willing to rent something a little lesser, or did you rent something a little better with more amenities than a house might have, etc) And it goes on and on and on … really an exercise in futility.
But that said, I think we can all agree that when the ratio of renting to buying is very high, it’s probably better to buy, and when the ratio of renting to buying is very low, it’s probably a good time to rent. Of course, if you want to buy for non-financial reasons, you should of course buy when convenient regardless of price ratios. And there are plenty of good non-financial reasons. We bought a house in the 90s, and even though we were only 2 people (pregnant with our first), we still decided to buy a 4 bedroom instead of a smaller house, even though smaller would be sufficient. My thought process at the time was that as we have more kids, we will need more space, and to avoid the costs and hassle of moving, we may as well just buy the bigger house at the start. So far, it’s worked out fine. We are still in the same house, and all 5 of our kids have lived their entire childhood here in this house. They’re all in their 20s now, and some of them have moved out. Two are married and each of the married couples will be giving us our first grandchildren that are expected sometime later this year. Can’t wait!!!