Comment by leelin | Hacker News Reader

Comment by leelin | Hacker News Reader

Very very cool!

I'm wondering why they chose 15 / 20 as the cutoff ratios though. I'm a licensed real estate agent in NYC and I've helped a number of clients make purchases where it was actually cheaper to buy than rent (usually a studio or 1BR, or outside Manhattan).

It seems like you can finance a home purchase these days at 5% or less on 30-year fixed. Add in the mortgage interest tax deduction and you are really borrowing at 3.00% (assuming your marginal tax is 40% including state / local taxes, which would be true of anyone buying a $1.3M 2br as referenced in the site).

That seems to justify a break-even ratio of about 33, not 16 or 20. Of course, you do have to add back HOA dues / coop maintenance + property taxes, and the nasty transaction costs for buying and selling. That is somewhat tempered by your rent (and property values) going up with inflation while your mortgage payments are fixed. Therefore, all the usual disclaimers apply that you need to be willing to stay there and own the property for quite some time.

EDIT: clarified that 5% rates are for 30 year fixed mortgages; 15-year amortizations would get 4.25% or so, changing by the day.

EDIT2: The tax deduction is LESS good in other metro areas. When I used to live in Redmond, WA, my marginal rate was not 40% (there is no state income tax in WA and houses are much cheaper). Also far more subtle but often ignored, in Washington most renters would take a standard deduction and only home-owners would itemize their deductions. Itemizing mortgage interest means you lose out on the standard deduction. In NYC, just about everyone itemizes because state / local income tax is already compelling enough to do so, therefore almost all the mortgage interest is deductible except for the amount subject to Pease provisions.

I agree. I just ran the numbers for SF. Based on mid-point of Trulia's buying and renting price ranges ($750K to buy, $3.25K monthly rent), I get the following annual real costs:

  buying:  ~$24K
  renting: ~$36K

That is based on the following assumptions: 40% margin tax rate, principal repayment is not a real cost (it's a saving account...) 15% down payment (renters invest the equivalent amount in a 3% annual return fund), 30 year ammortization of loan with a 4% rate (available now on 5 year ARMs -- you can always go back to renting in 5 years, and if rates soar then that means the economy has recovered, which means your house is worth more..), property tax of 1.16%, closing costs of $10K (that's high), spread over 5 years, home-owner insurance of $600 per year (that's what I pay), no insurance for renters

EDIT:

  less risky buying option : ~$30K

(now assuming a 5% loan (30-yr fixed), and PMI insurance of 0.5% of loan value, per year - require for less than 20% down)

There are many good replies to this thread, that essentially point out that buying a house is risky, and that my assumptions do not deal with any 'bad case' scenarios. But nor do my assumptions deal with any 'good case' scenarios (house prices being higher in 5 years time in San Francisco - it might just happen..) But the topic of the original article is about costs, not risk, so I kept the topic at parity, and only dealt with costs. If I were advising anyone for real on rent-vs-buy I would strongly encourage them to consider the risk and reward element of the rent-vs-buy decision, in the context the general financial situation.

Summary: buying is riskier than renting, and it can also be substantially cheaper. Right now, with a 30-yr fixed mortgage, it's cheaper. You have to take on the 'house price risk', but that also carries a potential reward, as this is San Francisco..

   available now on 5 year ARMs -- you can always go back to
   renting in 5 years, and if rates soar then that means the 
   economy has recovered, which means your house is worth more..

Rates soaring could also push the real estate prices drastically down.

The 'govt' will only raise rates substantially when they feel the economy requires a cooling effect (taking away the punch bowl just as the party gets started, and all..), by which time house prices will have gone up. The circumstance in which we could have high rates and falling property prices is the crash after the next rally (if market cools too quickly), which is a ways off.

I know the Bank of Canada better (econ prof from there) than the Federal Reserve. Their goal is to keep inflation at ~2%. Basically there are only a few tools they use, money supply and interest rates.

It is hard to bet on when inflation will become a concern and to what level. Banks are already betting on it happening with their 5 year fixed rates increasing before the actual rate has changed.

But it comes back to the point that if rates do skyrocket within 5 years at the end of your fixed term you could be stuck with a house lower in value than you purchased it and monthly rates you can't afford.

     >if rates soar then that means the economy has recovered

This is not true.

     >the economy has recovered,which means your house is worth more

This is also not true, taken independently of soaring rates or otherwise.

   > 30 year ammortization of loan with a 4% rate (available now on 5 year ARMs)

You realize that's how a ton of people lost their homes, right?

That's only a part truth. My example specifically deals with San Francisco (because Trulia showed it to be a 'rent not buy' city). In SF there have not been anything like the level of defaults seen elsewhere in the US. Elsewhere in the US, rate adjustments on ARMs were just one part of the problem. The other bigs ones behind the recent crisis were: over inflated house prices (in SF, prices were only down ~15% on peak); people qualifying for loans that they could not afford with-or-without rate changes (by lying about their income); people being unable to re-mortgage now because they have now equity/down-payment (tightening lending criteria as a result of previous over-loose criteria)

Summary: what you say is a true statement about part of the reason the US housing economy blew-up. But it's not very relevant to my example about buying a $750K house in SF with 15% down and a mortgage that you can actually afford (the only type you can get today - i.e. $100K in income)

My point is that you're taking on significant risk with a cavalier attitude. Let me try another:

  > if rates soar that means the economy has recovered and your house is worth more

You realize that LTCM went bankrupt betting on asset price correlations?

Well, the intention was not to be cavalier, but to try to ignore the risk side of the equation as much as possible, because thats what Trulia did, so the analysis could be comparable. Having read all the subsequent comments regarding risk, I now see that what I should have said is comparing renting to buying on a _cost only_ basis, w/o considering the differences in risk, is not a helpful analysis.

I still stand by the original assertion: buying in SF can be cheaper than renting (see the revised numbers), and the risk and reward there entailed is actually pretty small if: buying now (after a recent fall), getting a 30-yr fixed rate, and sticking around for ~5+ years

What does it mean to consider cost without considering risk, when the risk is that the cost may become more than you can afford?

"you can always go back to renting in 5 years"?

You mean sell the house? Fees alone would hammer you pretty hard if the value was flat for 5 years. Selling houses costs a LOT of money. Also, you need a 20% downpayment to dodge mortgage insurance, I think.

http://www.nytimes.com/interactive/business/buy-rent-calcula...

That gives a pretty clear picture. The moving parts that matter are interest rate, appreciation of the purchased home, and inflation of rent.

Principal repayment is a savings account if and only if real estate never declines in value.

True. But on the other hand, I'm not factoring any upside relating to increase in value. See my edit in parent about risk.

You're also not factoring in the maintenance costs of owning a house, which are also siphoning value out of that "savings account".

> you can always go back to renting in 5 years

For definitions of "always" where the real estate market never tanks and houses are easy to sell.

I am talking specifically about: a $750K house in San Francisco, bought at a time when the market has recently dropped ~15%, holding for 5 years, and with 15% down. That still does not qualify as 'always', but it seems to be very improbable that you wont be able to sell (w/o loss or default) in that case. It's not a 0% chance, but as I said in the edit to my original comment, buying a house is risky, but with risk comes reward.

(liquidity premium as well as risk)

I hope people aren't buying at 30x rental. The current US interest rates are at historic lows, so unless you get a fixed-rate mortgage you're going to be struggling when the interest rate goes up again.

I agree that the cutoffs are a bit low, and, at least for Seattle, I think the numbers for buying ($400-500K) are a bit high of reality.

I was able to buy last summer, trading in a rented two bedroom condo at $1350/mo for a two bedroom house in the same neighborhood, and I'm paying less than $50/mo more for my 30-year fixed mortgage than I was paying in rent. Yes, I've got more skin in the game with my downpayment, but it's in a growing neighborhood and I'm pretty confident that values in my area will go up in the next 5 years or so (its already appraised for higher than my purchase price).

Plus there are a lot of benefits to home ownership that I can't really assign a dollar value to. When I come home from my tech job and I don't want to sit in front of a keyboard anymore, I hack on my house. I've done a bunch of plumbing and electrical upgrades on the house, and I'm planning on building a backyard office / guest house "shed". And nothing can erase the stress of a long day quite like taking your shoes off and walking around in YOUR grass and relaxing in the backyard hammock.

If that stuff doesn't appeal to you, you'll probably be happier renting anyway. If I'd looked at it in purely financial terms I'd probably be in a rental myself.

(usually a studio or 1BR, or outside Manhattan)

I think this is the main qualifier. As I understand it, the data is comparing prices to rent vs buy on similar 2 bedrooms.

Reply on news.ycombinator.com