Rent or buy a home: breakeven analysis…

**Is It Better to Rent or Buy? What to Do in a Hot Housing Market**
**With surging rent and home prices, it’s worth doing the math**
**By Will Parker and Nate Rattner, The Wall Street Journal, May 13, 2022**

**While rents have risen rapidly all over the country, home-sales prices rose even more. Rent for a single-family home rose 13.1% in February, compared with the same month last year, according to housing data firm CoreLogic.**

**Home prices were up 20.9% in March, compared with a year ago. Interest rates for 30-year fixed-rate mortgages have also risen to an average of 5.3% as of the week of May 12, up from 2.96% a year ago, according to Freddie Mac. ...**

**The increased cost to buy a home means that the time it takes to break even, compared with what one would pay to rent a comparable house, has gotten longer. ...**

**Selling before the break-even time can cost a lot due to the projected costs of ownership, which include things like property taxes and maintenance, exceeding home price appreciation and the cost of renting a median-price house over the same period....But owning after the break-even time is advantageous and the advantage grows over time...** [end quote]

Whether you rent or buy, you have to live somewhere. This break-even analysis shows that people who plan to move often do better by renting. People who plan to stay put do better buying.

As part of my fiscally-conservative strategy, I bought young, using a special NYC program for first-time home buyers with a low fixed mortgage rate. (9.75%) I chose a home whose mortgage was the same as my rent since I knew I could swing it without effort. As I moved from house to house, I always exchanged in the same price range, capturing capital gains in the price of the new home but not stepping up to a higher mortgage although my income was increasing. I paid off my last mortgage, buying my boyfriend’s (now DH’s) home and paying off the mortgage to him. (He paid off his mortgage to the bank.) As a couple, we have been rent-free and mortgage-free since 1990.

The traditional advice for the fiscally-conservative is to pay no more than 25% of income for housing and pay off the home before retirement. (We retired in 2001.)

Although Zillow says that my home has appreciated to a ridiculous extent I don’t consider this part of my net worth. I think of it as “one housing unit” since I would just have to buy another house in the same market if I sold it.

The decision to rent vs. buy is probably the most important financial decision a household can make.



The decision to rent vs. buy is probably the most important financial decision a household can make.

I hear you sister.

Over the past 40 years, I’ve largely viewed real estate as an expense to be minimized rather than an investment. The rent vs. buy calculation didn’t turn positive for me until 2012 when I was living in a Portland OR suburb at the tail end of the 2008 housing crisis and bought a foreclosed home for 70% off its 2008 value. It’s since more than tripled in price. That’s the kind of unicorn you need to find in the residential real estate market to get anything like an S&P 500 return. And about the only thing that creates those kinds of real estate “gems” is the widespread pain and suffering of a massive housing market collapse.

When I moved to Houston from New York in 1981, I rented a 600 SF unit in a large garden apartment complex less than a mile from the Galleria Shopping Center for $400/month. The owner was in the process of turning half the property into condos. A 600 SF condo was selling for about $45,000 at the time. Mortgage interest rates were around 14% in 1981, but with itemized deductions and a high enough salary, after tax, the monthly cost of owning was about the same as renting.

Today (2021) that 600 SF Houston Galleria area condo sells for about $100,000 and the 600 SF apartment rents for $850/month. If you put the 20%, $9,000 down payment on the condo in an S&P500 index fund over the past 40 years, you’d have $693,000 today and the 1.6% dividend yield (about $11,000/yr) would more than cover the $850/month apartment rent.

I lived off and on in Houston for 25 years before I fled Texas for Washington State in 2006. It was a marvel to observe the low housing costs in the city. As REITs continued to build new apartment complexes as far as the eye could see, my monthly rent barely budged. When I left town, I was paying less than $600/month for a 900 SF unit in an apartment complex with several pools and tennis courts. I guess real estate developers are going to develop, and builders are going to build, as long as investors keep throwing money at them.

I saved at least at least a million dollars over 2 or 3 decades rigorously applying the rent analysis – and that money compounded into millions more since it was invested in the stock market rather than poorly appreciating single-family real estate.



Small factors can make big differences, and one small factor is how irrational the housing market can be. Buying a run down home in a good neighborhood can be a goldmine. I did that twice and did steady value adding fix ups and improvements using my own labor for a few years (hey, physical exercise is good), and made out like a bandit.

david fb