A blog post on Trulia caught my eye recently. It presented an in-depth analysis of buying/owning a home versus renting. It did this analysis for dozens of markets across the country and concluded that buying beats renting in most cases.
Unlike so many of the articles I see on this topic, I thought the Trulia post did a valid apples to apples comparison.
For one thing, the Trulia article compared buying/owning to renting an equivalent property. Many analyses of these kinds will pit buying a 3 bedroom, 2 1/2 bath single family home with a 2-car garage against renting a two bedroom apartment. It also accounted for all the extra costs of owning such as insurance and maintenance. In addition, the Trulia analysis pointed out that the results depend on at least three variables:
- Interest rate on the mortgage
- Your income tax bracket
- How long you stay in the house
Here are some numbers for Denver. Buy a home at 4.5% interest rate when you are in a 25% tax bracket and stay there for seven years. You will pay 35% less from buying instead of renting the same house.
Bump the interest rate to 5.5% and shorten the stay to just three years when you are in a 15% tax bracket and owning is still 10% cheaper than renting.
And yes — for you accountants and engineers and economists out there, the Trulia methodology does use Net Present Value in their calculation so that they account for the time value of money.
the article left out one variable we wanted to explore a bit – namely, appreciation in the value of the home.
In the Trulia piece, they rightly allowed you to play around with interest rate and tax bracket and length of stay in the property to see how those items affect the buy vs rent decision. However, in all cases, they hard-coded an annual property value appreciation figure into the analysis.
It would be great if they had allowed us to play with this variable also.
For example, Trulia’s 5-page white paper explaining their methodology has a sample case of buying versus renting in Seattle for a person in the 25% tax bracket and a mortgage of 3.5% and staying in the home for seven years. The annual appreciation rate in Seattle is assumed to be 2.6%.
It turns out that buying is 42% cheaper than renting given these assumptions. However, what if the appreciation was different over the seven years?
Interestingly, even with no appreciation in property value, the buy vs rent comparison would be neutral – you’d be no worse off from having bought.
On the other hand, if appreciation was just one-half percent higher at 3.1%, buying would be 49% cheaper than renting. At 3.6%, buying is 59% cheaper.
Nothing is a sure thing. Property values might go down while you own the house. That has happened to many people in the recent past.
But even if values goes down some during ownership of a property, many people find value in owning beyond just the dollars and cents. Even if it costs a couple hundred dollars more to buy, people get value from creating the space they love and that reflects their personal tastes. It is just nice to know that the odds still favor buying as a good financial decision.
Play around with the Trulia Interactive Calculator. You can adjust interest rate, tax bracket and length of home ownership (but not property appreciation rate, unfortunately). Then point to the Denver circle and you’ll see a summary of buy vs rent advantage.