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..
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)
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
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.
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.
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.
EDIT:
(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..