Renting and Buying

It wasn't long ago that major defining dichotomies in my peer group included Boxers v. Briefs and Science v. Humanities. As the years have gone by Renting v. Buying has made a big showing as an important and interesting question. People don't really discuss it much in person. I think this is related to the American taboo on discussing money. There are a lot of incorrect assumptions used in general. Here are a few thoughts:

1. Buying is an important part of living the American Dream. This is put forward by agents everywhere because it sells houses. Car makers do the same thing. I wouldn't be suprised if the white-picket-fence lobby was involved in the initial framing.
   
2. Renting is throwing away money. Buying things generally requires upfront costs and renting requires ongoing costs. At some point there is usually a breakeven point. For instance, it costs about $125 to rent a tuxedo. It costs about $300 to buy a nice one if you are smart about it. If you plan to wear yours 3 times in the next 5 years, buy. don't rent. In the case of houses, they require borrowing money. The way to price it out, is to make assumptions about how much the house will appreciate in market price, and pair those with the actual knowledge of how much it will cost you to borrow the money to buy it. If the interest rate is higher than the appreciation rate, you may be making a mistake. There are two other major issues to consider, the mortgage deduction and the opportunity cost of owning. The bad news about getting a loan is that much of the money you pay the bank is interest. The good news is that you get a special tax break called the mortgage deduction. Basically, you don't pay income tax on the portion of your income that goes to paying interest from your mortgage. This advantage is partially offset by the fact that you have to pay property taxes. Lastly, if, instead of putting 20% of the purchase price as a down payment, you invested the money, you'd be getting interest on it. For instance if you put down $50,000 and got a 30 year loan, by the end of those 30 years, the $50,000 would have grown to about $400,000. Putting money down on a house prevents you from pursuing other profitable ways to use the money. A major cost of putting money down is those lost oppurtunities, this is called opportunity cost. Your house would need to appreciate dramatically to makeup for the $400,000 you theoretically could have made if you kept on renting.
   
3. These numbers are like super complicated, man. There is a great calculator here, put out by the NYT which addresses some of the above issues.
   
4. According to this article if price to buy is 15 times greater than annual rent the two options are financially similar. (Not sure how, if at all, he factored in opportunity cost.) It follows that if a house costs more than about 15 times the annual rent, you'd pay less renting over the foreseeable near future and if a house costs less than about 14 times you'd be best off buying if you plan to stay a while.
5. How about if you don't plan to stay a while? There are one-time costs when you buy a house. These non-recurring expenses are often called closing costs. In DC they tend to run about 3% of the transaction and include things like broker fees, paperwork costs, etc. The shorter you live somewhere the greater the issue of closing costs. If you move after two years the closing costs work out to about 1.5% per year that you lived there. Over ten years it's just .3%. Given that home appreciation over time approximated inflation (~3%), if you move quickly closing costs eat up most of your appreciation.
   
6. But my landlord doesn't get things fixed quickly. That's a good point. It is nice to be in control of your living situation. There reasons to own that aren't financial.
   

All things considered there are good arguments for owning, some financial, some not, but there is a lot of bad information out there and it's rare, so far as I have heard, to find real estate professionals who understand or communicate the real financial issues.