NAR July06: Renting can cost 7x more than owning

[powayseller]

To Buy Or Not To Buy; NAR Consumer Brochure Answers The Question

WASHINGTON (July 19, 2006) – Renting can cost more than seven times annually than owning, according to a newly revised consumer education brochure from the National Association of Realtors®. The brochure, “Why rent when you can buy?” challenges certain assumptions about renting versus buying and helps Realtors® evaluate with their clients and customers whether homeownership is right for them.

“Housing is a good investment, and owning a home makes sense for a lot of current renters, but many would-be homeowners are reluctant to take those first steps,” said 2006 NAR President Thomas M. Stevens, senior vice president of NRT Inc., from Vienna, Va. “Given their experience with homebuyer concerns and insight into local markets, Realtors® can counsel consumers about their options and provide the information and support people need to begin their journey toward homeownership.”

The Federal Reserve Board estimates that homeowners have a net worth nearly 36 times more than that of renters. Over the past 10 years, the cost of rental housing in the United States has increased an average of 3 percent per year; average rents are projected to rise 4.1 percent this year alone. With a 3 percent annual increase, a current rental payment of $1,000 per month would increase every year and amount to $137,567 after 10 years, with no wealth accumulation.

In contrast, a $210,000 home purchased today with a downpayment of $10,000 and a 30-year fixed rate mortgage at 6.5 percent would cost a steady $1,100 per month and yield a net worth of $138,521 after 10 years, assuming an historic 4.5 percent annual appreciation rate.

“The decision to become a homeowner involves financial and emotional considerations,” Stevens said. “Our Realtor® members help millions of people into homes every year, one family at a time.”

“Why rent when you can buy?” is available in both English and Spanish. To order copies, visit http://www.Realtor.org/store or call 1-800-874-6500.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

[Anonymous]

Chris Johnston

Trust me, there are going to be lawsuits when this is all said and done against organizations like this. The political grandstanding will require it.

[Bugs]

I have a feeling that most renters in this region would be happy to pull the trigger and buy a $210,000 home at 6.5% interest.

[rankandfile]

Amen to that.

[sdduuuude]

Wow.

[Daniel]

Well, in general buying is way better than renting, no brainer here. But there are times when this relationship is turned on its head. One of those times happens to be right now (at least in SD).

Wall Street could have said in 2000 that stocks in general perform way better than cash. Strictly speaking, that would have been true as well.

PS: gotta love the observation that homeowners are worth 36 times as much as renters (which is probably true, I have no reason to doubt it). But I happen to know a thing or two about statistics, and I can offer an even better investment idea: people who own Rolex watches are worth on average 500 times as much as those who don’t. However, before you rush to your favorite watch dealer to do a 100% financing on a Rolex, you would do well to remember that correlation and causality are very different things…

[hipmatt]

It is all lies and based on assumptions, like it says.

1. a $210k home…show me one in socal

2. they assume a down payment. most people are using 100% financing these days.

3. they assume a 30 year fixed. most people use interest only or arms that would pay off no or very little principle balance.

4. they lie about the mortgage price. A $200k loan with 6.5% fixed rate for 30 years gives you a payment of $1264 for principal and interest ONLY, it does not include taxes, insurance, mortgage insurance(less than 20% down) and or HOA expenses. Realistically this payment would be about $1500 per month or more.

5. The biggest flaw. They assume that homes will appreciate 4.5% per year. Did they forget the past? This is like saying the stock market only goes up. Housing is equally as volotile. In the next 10 years, homes will most likely go down and then back up, and they will be lucky to break even.

6. A $210k home that appreciates 4.5% per year would be worth about $330k in 10 years. At $1500 per month you would have spent $180k in 10 years on payments plus your $10k down and closing costs coming close to $200k total invested. WAY higher than the $137k that the renter has paid. If you take a look at the amortization schedule, you will see that with their loan suggestion, you would still owe $170k at year 10. You take $330k home value – $170k loan balance – 6% commision(about $20k) and you get $140k net worth like they say.

7. If you rented and invested the $10k down payment in a modest CD account(we’ll say 4% even though 5.25% is common now)and contributed the extra $400 per month difference between rent and mortgage payment to the account, you would have a net worth of $74k in 10 years.

8. As you can see in this scenerio, they’re math is all fugged up. And I was conservative on all my numbers. In the real world, one may earn a higher rate of CD’s or investments. I also didn’t include closing costs or repairs to the home which the renter wouldn’t have to pay.

Bottom line is if the house value stayed the same, and neither went up or down in value in the 10 years, the renter would be way ahead. $210-$170-$12.6k= $27k The renter would have $47k more in his pocket than the owner. Of coarse the smart renter will rent untill the market bottoms out, then purchase a home, enjoy the appreciation, and make a much larger profit than either case here.

Why own, when you can rent!

P.S. “why own, when you can rent” is available in English ONLY.

[pencilneck]

Quote:The Federal Reserve Board estimates that homeowners have a net worth nearly 36 times more than that of renters.

I have always loved the argument that you are more likely to be wealthy if you own your own home.

Limosine owners have a net income of over 10 times the average income of those who use public transportation. Wouldn’t it make sense for everyone to purchase limosines as well?

[powayseller]

hipmatt, I am not counting on my next home giving me much appreciation. When will we see the next asset bubble? Well, perhaps we will…. Historically, U.S. housing goes up at a real rate of .4%. Perhaps it’s a tad bit higher in S. CA, but it is the worst performing asset class that I know of. A house should be a place to live, and we should not ever expect it to be more, or we will be disappointed. We make money on our investments, not our houses. The Bubble cities are an exception, but when will we see the next bubble?

[SDLaw06]

The article is from Washington, I imagine there are lots of places across the country where it still maked better sense to buy than rent, just not in CA.

[VADCMD]

The market rules are the same everywhere, CA, DC or NY.
The thing is that people in the real estate industry are always trying to persuade people to buy, which is understandable. Their startegy normally focus on the advantages of owning a home. As a individual, you need to realize the risk and gain of owning a home now. In my opinion, those who get in the housing martket now will be a loser.

[Anonymous]

It may be useful to run your cost benefit analysis re: renting versus buying over a 40 to 50 year term. If a homeowner can afford the monthly cost of ownership, the home will be paid in full at some point. For the example use 30 years. Rents have risen on average 3-4% in my region for last 30 years. What will be the rental rate 30 years from now vs. the constant mortgage payment. One has the opportunity to have no housing payment (other than maintenance, taxes, insurance)at year 30. If one continues renting (other than the wealthy) will be paying a substantial portion of retirement cash flow on rental. Rent vs. buy should not be based upon capital gain unless talking about speculation or strictly investment purposes. The price of housing over a 30 year span may go up or down but it doesn’t matter if the goal is to retire with minimal housing cost.

[sdduuuude]

RLA

But, you aren’t stuck with the decision to rent for 40 years. You could be stuck with the decision to buy, however.

If you rent and prices come down in 5 years, then you buy, using your long-term analysis argument. You have flexibility. If life forces you out of the area, you can simply go.

If you buy and prices come down in 5 years, you have spent the last 5 years paying extra to lose money, and you are stuck with the house, possibly upside down. If life forces you out of the area, you have to sell, incurring the 5% transaction cost of doing so, or rent the place out, taking a monthly loss.

[powayseller]

I posted this to show how ludicrous the NAR has become. Will you all get mad at me if I call them li*rs?

[Anonymous]

sduuuude
Some may be stuck with the decision to rent for 40 years for all kinds of reasons, too many to elaborate here. And yes you could be stuck with a bad credit rating if you buy beyond your means and/or bad fortune strikes(job loss, health issue etc.). You might get struck by lightning too. The best one can do is minimize the risk in life decisions and try your best to meet your goals and survive.

I was not trying to justify buying at the current prices in San Diego. They will come back to earth and offer better opportunities in the future. It is obvious that if a persons individual circumstances change (job loss, health issues, family crises etc.) and one must relocate or cannot afford to keep the home purchased, and if the home is not worth more than mortgages plus closing costs then your observation is correct. It is impossible to provide a rent vs. buy argument for all humans all the time in all markets because of uniqueness of each human experience.

As you state if you rent and prices come down in 5 years then you buy. What if prices go down even more after you buy? No one knows where the bottom is.

The point I was trying to make is at some point in ones life if you have the opportunity to buy and can hang on through the ups and downs of life, in the long run having a residence paid off is better than renting when you are living on limited income.

[Author]

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