The back and forth between Perry and noone was good, but if someone as thoughtful as noone forgets to include important parts of the make vs. buy analysis (e.g. opportunity cost of down payment), I think we can all understand that others are likely making financial decisions in the dark.
Now that some in the industry are arguing that the market is getting back to “normal,” I’m reminded of some rules of thumb from many years ago, when things were “normal.” If there are any journalists reading, you can probably repurpose some stories from ~25 years ago with the following rules of thumb:
1. Don’t buy a house unless you plan to live in it for at least 7 years. Otherwise, there’s a good possibility you won’t make up for your closing and other transaction costs. Noone’s analysis above more-or-less cooroborates that this is in the ballpark.
2. Don’t spend more than 25% of your after-tax income monthly on housing. Otherwise, you won’t have enough money to have a life, let alone a safety net. This was later raised to 30%, I believe in the late 1980s or early 1990s.
3. The full monthly cost of owning a house is roughtly 1% of the price of the house. This should be the starting point for your rent vs. buy analysis. This includes mortgage payments, taxes, insurance, maintenance, lost opportunity cost of down payment, tax benefits, transaction costs, etc. Don’t be blinded by one or two financial benefits of owning a house, e.g. tax benefits or “throwing away money,” without considering all dozen or so factors. Perry’s analysis above more-or-less corroborates that this is in the ballpark.
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There are some reasons why these rules of thumb might be too conservative for this millenium. On the other hand, there are other arguments why these might not be conservative enough given the current environment. Taken together, I think all-in-all they’re probably good for their purpose as rules-of-thumb. On the one hand, for example, real estate had been going up faster lately. And, the market might be more competitive in some regions because of a larger population and easier credit. On the other hand, from about 1980 to 2005 (25 years), interest rates had been almost consistently decreasing to a point (~1%) where they realistically couldn’t go any lower. Also, the baby boomers for the past 25 years have been in their peak money making years. Beginning in 2008 (2011?), they’ll be retiring in larger batches.
Even if the (7, 25, 1) rules-of-thumb aren’t the exact numbers, having similar rules-of-thumb would be helpful for many people. And, debates about the exact figures could more easily be translated to have mass appeal. Worth having as a separate, new forum topic?
