Their default settings though significantly favor housing. Still, it’s highly useful to show that housing appreciation is the only thing that makes owning worthwhile at this point.
With their base settings, my current rental says I’m better off buying ($575,000, 6%, 20% down) with $21K in savings over 7 years. Adjusting my tax rate up to 40% marginal, it get’s even better, $32K.
However, if I correct some assumptions for SoCal, first rent with rent appreciation of 5% (was 2.5%) for worst case, I get savings of $46K. (Actually I think rent will stay flat, but I’ll do that at the end.)
However when I correct the housing and investment rates it changes dramatically:
If housing slows to 2.5% appreciation, essentially on par with inflation. The savings from buying disappears for a $22K loss. Even if rents increase 5% a year, I hold for 7 years, if the house only appreciates another 19%, I lose $22K compared to renting.
If I hold a shorter 5 years, naturally, I do worse, $32K loss.
If change my savings rate to 10% from 8%, I would lose $52K by buying over seven years.
If rents appreciate slower, say the default 2.5% and housing is 2.5% annual appreciation, I would lose $36K by buying with a 8% ROI on savings and $66K with a 10% ROI on savings.
If housing actually goes flat near term, maintaining nominal current prices for 5 years, it gets really bad even with 5% annual rent increases, with a $103K loss from buying. (Over a mere five years, that’s $20,000 a year)
If housing slightly corrects over the next 5 years with a 2% loss annually (~10% total nominal loss over five years) and rents increase at 5%, I’d lose $155K to $180K at 8% and 10% savings ROI.
Finally, my last scenario, rental crunch, 10% annual rent increases, 2.5% appreciation on housing, add HOA fees, and a 10% savings ROI with 40% tax bracket for 5 years…
I still save $50,000 by renting.
Even using a mere 8% savings rate, I still come out saving by renting.
When it’s all said an done, I break even by buying the townhouse I rent if in the next five years, the townhouse goes from $575K to $700K and my rent goes from $1950 to $2850.
Anybody care to put odds on either one of those two requirements happening?
