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Friday, September 23, 2005

NYTimes: Is It Better to Buy or Rent?

by Calculated Risk on 9/23/2005 07:44:00 PM

The NYTimes has an article comparing buying and renting in New York and San Francisco: Is It Better to Buy or Rent?

"... renting might deserve another look right now. After five years in which rents have barely budged while house prices in New York, Washington, Los Angeles and elsewhere have doubled, renting has become a surprisingly smart option for many people who never would have considered it before.
...
Add it all up - which The New York Times did, in an analysis of the major costs and benefits of owning and renting, including tax breaks - and owning a home today is more expensive than renting in much of the Northeast, Florida and California. Only if prices rise well above their already lofty levels will home ownership turn out to be the good deal that it is widely assumed to be."
Check the graphics on the left of the article. The New York house, selling for $1 Million $750 thousand (corrected) could be rented for $2400 per month. A $1 million house in San Francisco rents for $2500 per month. The article compares the total costs for buying and renting, including all tax deductions and renting comes out ahead unless property values continue to rise faster than historical norms.

The analysis was very generous to buyers. They assume the homebuyers receive the entire benefit of the interest and property tax deduction. The article correctly points out this may not be true:
"Don't be buying a house because you think you're saving on the taxes," said Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va. "You'll save even more by not buying and renting."

Mr. LLosa added: "I'm not saying not to buy. I'm saying don't buy just for the tax reasons."

Many homeowners also do not receive the full deductions from home ownership. In the Northeast and California, homeowners now have so many deductions that some must pay the alternative minimum tax. This tax effectively wipes out part of their property-tax deduction, further cutting into the benefits of home ownership.

Other homeowners do not itemize their deductions or, if they do so, end up with total deductions only a little larger than the standard deduction that the government offers to all taxpayers, even renters.

"A lot of people hugely overvalue the mortgage deduction," said Dean Baker, co-director of the Center for Economic and Policy Research, a liberal group in Washington, "because they compare it to no deduction instead of comparing it to the standard deduction."
The article also points out some of the extra benefits of ownership, like stability and being able to choose the "color of their living room walls", but there advantages to renting too - like being able to move easier.

If I was moving to a new bubble area, I would definitely rent.