Rent or Buy? The Math Is Changing

New York Times ^ | 05/27/2014 | Neil Irwin

[SeekAndFind]

Billy Gasparino and Jenna Dillon-Gasparino were savvy enough to wait out the housing boom of a decade ago as renters. Not until 2010, well into the bust, did they buy a house in the Venice neighborhood of Los Angeles, less than a mile from the beach, for $810,000.

Only four years later, the couple see new signs of excess in the housing market and have decided to go back to renting. They are close to a deal to sell their house – for $1.35 million, a cool 67 percent gain.

“It just seems like the housing market came back so strongly, so fast, that maybe there’s a little bit of a bubble there,” said Mr. Gasparino, 37, an executive with the San Diego Padres.

Their decision reflects a new reality in many of the nation’s largest metropolitan areas. An analysis by The New York Times finds that in the country’s most expensive places, including New York, the San Francisco Bay Area and Los Angeles, buying a home again looks like a perilous investment, based on the relationship between their prices and rents or incomes. And in a longer list of areas, including Boston, Miami and Washington, prices have risen enough that buying is no longer the bargain it looked to be a few years ago.

[SeaHawkFan]

They could buy that same house in Texas with cash and have $300,000 left over.

[silverleaf]

when people like this start treating their houses as investments to be sold at top dollar - RUN

Don’t be that sucker $1.35 million buyer

[dfwgator]

Hey, I love renters, they’re going to fund my retirement.

[dfwgator]

I figure owning a home is a break-even proposition at best.

Still beats paying out hundreds of thousands of dollars over a period of time with nothing to show for it once you move out.

[ladyjane]

The $500,000 gain is not subject to tax if certain conditions are met: the homeowners must have lived in the home for at least two of the past five years. If the homeowner is single, the amount of non-taxed gain allowed is $250,000.

Other factors can affect the amount owed. For example, if the house had been rented and depreciated the difference between the basis and the gain will be larger and possibly taxed. Even if it hadn’t been depreciated while it was rented the IRS will take depreciation. That’s a nasty surprise for some folks.

Re the short-sales getting taxed on what you call the “non-existent” profit, that’s easily explained. The profit is real. The owners kept re-financing and taking cash out as property values went up. The money they sucked out with mortgages was real money. They spent it.

[Cyclone59]

renting is more expensive over the long term:

example:
300k purchase with a 220k 15 year mortgage @ 3.4% interest (1520 monthly) PLUS a 3600 yearly tax bill. Compared to a 2200 monthly rent over the same period of time. Tax savings not considered in my calculations. I am using market rates for renting the same house that is being purchased. (2400 square feet in the western suburbs of St. Louis)

assume a 5% increase in rent or real estate taxes
Purchase total cash flow = 351k
rental cash flow = 569k

assume a 2.5% increase in rent or real estate taxes
Purchase total cash flow = 338k
rental cash flow = 473k

[Georgia Girl 2]

LOL!
Yes owning something is just dumb when you could be paying $1,000 plus rent to a stranger every month. :-)

[dfwgator]

There's no such thing as owning a house.

You own the Deed, that is what is bought and sold.

[Mr Rogers]

“Yeah, it’s always better to give your money to someone else, than to build equity. /s”

It beats building equity that will soon be debt due to a market bubble. If a house has a reasonable price of $250K based on wages, etc, and you are building equity after buying it at $500K, you are screwed.

[Reeses]

Here in PA the real estate taxes, particularly what the school districts extract, are crippling.

Some vacation areas in northeastern PA have reasonable property taxes because currently they do not have many NY/NJ refugees using their public schools. The commute to their jobs is too far. However within 10 years people will be buying self-driving cars and expanding their commute range. That area is prime for a huge influx of NYers. It's a good area to invest in real estate, but plan an exit strategy.

[Cyclone59]

My best friend once was concerned about his son being in trouble at school, doing badly, etc. and he drove him by the trailer park and parked in the middle, and he told his son “Take a look around, look at them closely, pick one out, because that’s where you’re gonna end up if you don’t get your act together.”

I did that to a bunch of my high school daughters friends a few years ago - all middle class suburb living white, black, and mixed girls all talking ghetto in my house. I got to a breaking point and told them to all pile in the car for a "field trip". I took them to Walnut Park in north St. Louis. Got there, put the car in park and unlocked the doors. Told them if they wanted to continue to talk that way, get out and live here. They couldn't lock the doors fast enough and I have never heard ghetto speak again. I even had their parents thank me for the eye opening experience, as it was driving them crazy too.

[Clemenza]

Easy to say that if you live in the South where housing is so dirt cheap even migrant workers can put down a nut on a three bedroom. In NY (where I am from) and São Paulo (where I live now), you might as well rent a place an invest your money elsewhere. I think of “homeownership” as a fetish, particularly thanks to Fannie, Freddie, and the 30 year mortgage.

[Durbin]

I agree completely. Just giving my personal preference and experience.