Rent While The Renting Is Good?

According to the New York Times, if you’re renting you’re smart.

Over the next five years, which is about the average amount of time recent buyers have remained in their homes, prices in the Los Angeles area would have to rise more than 5 percent a year for a typical buyer there to do better than a renter. The same is true in Phoenix, Las Vegas, the New York region, Northern California and South Florida. In the Boston and Washington areas, the break-even point is about 4 percent.

“House prices have to fall more before housing becomes a clear buy again,” says Mark Zandi, chief economist of Moody’s Economy.com, a research company that helped conduct the analysis. “These markets aren’t as overvalued as they were a year ago or two years ago, but they’re still unfriendly. And that’s one of the reasons the market is still soft — people realize it’s not a bargain.”

Unless you plan on living in your home long-term, you may want to hold off and see what happens to the market. —MEGHANN MARCO

A Word of Advice During a Housing Slump: Rent [NYT]
(Photo: Sugar Pond)

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  1. tcabeen says:

    We’re renting in Miami, mostly due to insurance and property tax costs, and the fact that we’re leaving this …abyss… asap. :)

    Finding out that it’s the smartest thing to do was a nice bonus.

  2. cgmaetc says:

    I’m not so sure about here in Los Angeles… an average 2 bedroom apt in a decent neighborhood and nicely kept building or complex (like in the nicest part of Inglewood) is going to cost you at least $2500 a month out here. You can probably find a 3 bed/2 bath home on a large lot in Inglewood for $550K-$600K, with the right down payment and credit score your mortgage would be $2500-$2700/month. And with the new businesses and new townhomes and condos being built in that area, the value will increase within 8-15 years. It’s LA, land is at a premium here, event he new homes are small. This may be true of other places, but over time, the value here will be hight than elsewhere, just because it’s LA. In my opinion, if you can own for the same price, renting is a waste of money.

  3. Kluv says:

    The other thing that’s difficult to account for (especially for those of us in NYC who do not have a rent-controlledstabilized place) is how much your rent will actually go up each year.

    Sure, some years it may stay around 5% — but I’ve have friends who suddenly found themselves with 15-20% increases, much to their dismay.

  4. lalawgirl says:

    I couldn’t agree more with cgmaetc.

    I bought a two bedroom condo in 2005 in a neighborhood where rents are more than my mortgage. I figure that property taxes and HOA does and my income tax savings just about average out.

    So in reality, I’ve locked in my “rent.” While my mortgage will not go up, I am darn well sure the rent on my neighbors’ apartments will!

  5. chrisgeleven says:

    I have an issue right now. My fiancee and I rent a 1 bedroom condo from my fiancee’s father. We are getting married in September and he has offered to sell us the condo, at a good 10-20k off the market price (in a way, a wedding gift). The idea then is in a few years, we sell the place and make a pretty nice profit off of it that we can use towards a bigger place (when we are ready to have kids). Great right?

    My biggest issue is even with his generous offer, the payment will be higher then what we pay right now (due to a higher interest rate, since we don’t have anywhere near her father’s credit history), nevermind the fact that we would have to pay property taxes, closing fees, etc. Our budget, which is already fairly stretched, is going to be maxed out if we go this way. However you are talking a nice little payoff in a few years, plus the benefits of a tax deduction.

    Any ideas on what to do?

  6. etinterrapax says:

    I think I preferred the other thing with the math wizardry that said that owning was always a better bet than renting, on account of our owning right now and my wanting to feel optimistic about our situation.

    In truth, I do. Condos are still selling well around here, thanks to downsizing baby boomers, and we live in the favorable school district of the two largest in the area. Not everyone shares my disdain for the forthcoming nearby Wal-Mart; I’m satisfied for them to pay us another cost for low prices. We don’t have any delusions about a huge profit, since we’ll need to trade up for size before the market recovers. If we can make an inflationary profit, we’ll be happy. Hell, even getting our down payment out of it would be a satisfactory. And we pay the same to own as we would to rent, and the taxes are reasonable. I’m glad we didn’t stretch our limits for a McMansion on a postage stamp, that’s for sure.

  7. simplelife75 says:

    TO Chrisgeleven: granted I don’t know where you live and all the details of the place but the deal sounds a little iffy to me… You were a good renter for him all these years and now he wants to sell you the place at 10-20k off the market price? First off what is the market price? Where I live you couldn’t sell a place at all right now, there is no buying going on. Does that make the market price of a $400,000 home zero? Maybe not, but until you have some REASONABLE comps I wouldn’t trust the “market price”. Secondly, you are doing him a favor, he doesn’t need to find another renter if you buy the place, nor does he have to find buyer. If the price of the condo is $400,000 and you are the buyer that saves him $24,000 in closing costs right there. 10-20K off the “market price”, that sure is some present… Are you sure you want to marry into this family?

    To cgmaetec: There are a lot more costs than just doing a straight comparison on the price of your rent versus the price of your mortgage. Lost opportunity cost of your equity (stocks perform better than real estate in the long run), plus you have the hassle and cost (think tens of thousands of dollars!!) of actually selling the place. Sure uncle sam gives you a break if you are lucky enough to fall out of AMT, but the bottom line is that unless you are going to be there for at least 5 years, it makes little sense to buy…

  8. zolielo says:

    @cgmaetc: What would be the best location in Inglewood? The section that is along side of Westchester? Just curious.

  9. cgmaetc says:

    zolieo: Ohh, there are many nice pockets in Inglewood. That Westchester area is great, but also look in the Avenues: between Arbor Viate, Crenshaw, Century, Van Ness. 5th, 6th, and 7th avenue are the nicest streets. There is a new development called Reinassance that was built about 12-18 months ago on Pincay/90th between Crenshaw and Prairie. And Hollywood Park Racetrack will close soon and a developer will be building homes there in 2008.

  10. mac-phisto says:

    @chrisgeleven: you really don’t want to max yourself out just to buy a place. you’ll find yourself getting behind & things can quickly get out of control. plus, do you know monetary problems are commonly cited as the main reason for divorce? don’t doom your marriage just to own a place.

    you can still save up for a house by throwing money in a savings account & working on building good credit. plus, the tax deduction is nominal compared to the interest you pay (i think it figures out to be a rebate of less than 10%).

    if you still think you can handle it, there may be a way to leverage his “generosity” in a way that you could get into a good loan with a low interest rate b/c of a sizable down payment (assuming you have some $$$ saved up in addition to his gifted equity).

    you don’t want to bank on increased value 5 or 10 years down the road as a primary reason to buy a place. take a look at the condo market in the late 80′s: when the market tanked, some condos lost as much as half their value. i know someone who got a steal on a couple condos in the early 90′s ($60,000 for 2 nice places) – the neighborhood went to shit & she ended up selling them BOTH for $20,000 less than 10 years later. so what happens if it comes time to move & prices have stagnated? remember, a seller spends 6% or more to sell their property. you could wind up taking a big loss instead of a pretty nice profit.

    it doesn’t hurt to talk to a professional in the mortgage industry (which is not me, by any means). reach out to friends that may be realtors or mortgage brokers or homeowners & probe them for info. no friends? sit down with a local mortgage broker (just watch out for the hard sale) or a loan officer or a financial adviser. considering your marriage plans, that last suggestion might also help start your marriage out on the right foot (money wise anyway).

  11. zolielo says:

    @cgmaetc: Thanks for the info particularly that Hollywood Park is closing.

  12. silenuswise says:

    Yes, it’s true that L.A. is a unique market, at least in some respects. But even here, owning isn’t always cheaper than renting. I’m locked into 3% maximum rent increases each year, since the building I live in is just old enough to squeeze under rent control, and the landlord has only raised my rent twice since I moved in 7 years ago. I’m in no hurry to move because I live in climate paradise (Century City, where the mild Pacific breezes blow year-round), and, of course, everything’s in reach–ocean, mountains, Santa Monica, Hollywood. Plus, uh, it’s cheap as hell. So it’s still a sweet deal for me.

  13. FLConsumer says:

    Renting vs. Owning is a toss-up in Florida. I just bought my new home last year after renting for 3 years. By-far, I’m much further ahead with owning, even with the terrible market inflation which occurred. I get more sqft for less money and it’s mine to do with as I wish.

    The quality-of-life factor has yet to be mentioned. In general, apartments (esp. apartment complexes) are poorly-built, overcrowded, overflowing trash dumpsters, lack of parking, have a transient population, often have residents who don’t take care/pride of the place, and often have management who doesn’t believe in maintenance either.

    Chances are that an apartment isn’t going to have: heated natural stone floors throughout, real wood floors in bedrooms, recessed lighting in every room w/whole-house lighting controls, whole-house sound system, steam room & sauna inside the actual unit, European/Japanese appliances, high-efficiency appliances, top quality fittings & construction, travertine marble bathrooms, heated towel bars, etc. etc. etc. On top of that, my neighbours are quiet, many have lived here for >10 years.

    Overall, there’s no comparison in the owning vs. apartment experience for me. Sure, if something breaks, it’s my dime, *BUT* it gets fixed immediately. No waiting 3+ months for apartment management to fix a broken dishwasher, 6+ months to repair a non-functional stove (they never fixed it…I moved before they ever fixed it). Not only that, repairs are done properly, not half-assed like the apartment maintenance crew loved to do. Additionally, my expenses are lower, even including insurance. The reduction in my electrical bills more than makes up for it. Quality throughout. I don’t hear people stomping like elephants above me, don’t hear my next-door neighbours fighting and occasionally screwing their brains out ’til all hours of the morning.

  14. chrisfromnl says:

    Here is a great little calculator to figure out if renting/buying would be smarter in terms of years. Enter all the information to get a really accurate graph for your area.

    http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GR

  15. frankadelic says:

    I live in Queens and this is 100% true. My apartment is $1275 a month while it could probably go for $300K if put on the market. Add in the maintenance fee and I’d easily be paying over $2200 a month.

    I’m going to continue to rent and save my money until house prices aren’t as insane around here.

  16. @cgmaetc: “In my opinion, if you can own for the same price, renting is a waste of money.”

    Now, we own and we jumped to owning as fast as humanly possible. However, renting may be the smarter choice if you’re NOT planning on being there more than five years (cost in reselling a home in less than 5 years isn’t recouped unless you’re in a superheated market) OR if you don’t want to deal with maintainence.

    Sort of the dirty little secret that you probably know in your head but you won’t actually realize the financial impact of until you buy is that as a renter, expensive things are your landlord’s problem. As a homeowner, they’re yours. Sure, our mortgage (including insurance & property taxes & PMI) is no more than local rent would be. But a basement leak is a $3,000 problem. The garage needs to be replaced to the tune of $7,000+ (I’m hoping it gets struck by lightning or something so insurance will pay for it). The furnace and A/C need yearly servicing when they DON’T break. I had $300 of plumbing done in January. Love the result, but still $300.

    There’s all kinds of major things in a house that only RARELY need replacing, but are expensive when they do, and there’s enough of them that they come up with some regularity. (Roof, windows, water heater, my farking garage, etc.)

    If you’re very close to the margin and stretching to make the payment, you may be better off renting because your “surprise” costs are going to be much, much lower. If you can afford $1000 a month and no more, and you buy a house at $1000 a month, a leaky pipe or a busted furnace is going to put you in a very ugly financial position.

    I think if I were advising a first-time homebuyer, I’d say, “If you can afford $1,000/month, buy at $800/month and put that $200/month somewhere safe for disasters!” (And for God’s sake, calculate by the traditional methods, not the new ones where the bank says, “Oh, sure, 50% of your income on your mortgage is a GREAT idea!”)

  17. Point one: A story for you!
    Timmy graduates college.
    Timmy gets a job.
    Timmy sees housing market falling.
    Timmy and every person he graduates with goes off and gets an apartment while they wait for the market to bottom out.
    Timmy watches the rental market, responding to new demand from worried buyers like Timmy, go fucking crazy.
    Timmy (and I) are stuck in a lease in the D.C. metro area that is 300$ above the national average.
    Timmy (and I) are screwed.

    This isn’t GOING to happen; it IS happening, at least in my neck of the woods. Granted two out of three people in the D.C. area won’t be here in 2 years, but still it’s a noticably big increase.

    Point two: I agree with Eyebrows. Owning a house vs. renting is a lot bigger pain in the ass than most people realize. Having the investment means protecting it, which means for shorter periods, rental is usually a better option.

    Point three: @tcabeen: Buying a home in Miami is always a pain given the lack of space, the awfully long commutes from where new homes are being built, and the general sketchiness of neighborhoods where affordable houses are.
    Condos, on the other hand, are a different story given all the new non-luxury buildings going up in downtown. There are also affordable places if you know where to look.
    Here is where you scream and complain about living in downtown or in Wynwood, but hell, since you aren’t committed to the place anyway, there’s no real point in arguing. Leave already, I’ll be down there in 6 months. Unlike you, I like it down there :)