February 20, 2007

Oh dear god. Do the "rent vs. own" calculator at CEPR. And get ready for the crash of a lifetime


I did the calculator for rent vs. own for Phoenix. I assumed a $500,000 house, 5% down, sell in 5 years, and finance with a 30 year fixed 6.5%.

Owning would cost $192,000 more than renting over those five years based on their calculations. And that assumes $3000 a month in rent! I think on a $500,000 house in Phoenix you could rent the place for $1200 or so a month. Oh dear god.

Take it for a spin and you'll see why yes, fundamentals do matter. And it's all about the P/E. It's ALWAYS about the P/E.

Costs of Ownership v. Renting:
Your basic costs start at $ 3,400 per month. However, if you can rent a similar home for less than $ 6,000 per month, you may be better off renting.

House Appreciation (real)
-52%
Purchase Price
$ 500,000
Monthly Rent
3,000
Ownership Costs
Sale Price
239,500
Outstanding Mortgage
387,300
Commission and fees
14,400
Total Cash (Owning)
-162,100
Equivalent Rental Costs
Returned Security Deposit Value
2,600
Net Savings (See details)
27,400
Total Cash (Renting)
30,000

50 comments:

Anonymous said...

This calculator does not take into account Taxes, Insurance, HOA Fees, reserve for repairs, etc.

Anonymous said...

Wait wait wait - that calculator is showing anywhere from 50% - 60% drop in resale value NO MATTER WHAT TIME FRAME I put in. Whether 1 year or 30 years, it shows the same projected resale price. Well, I'm as contrarian as they get and I fully expect a 50% haircut. But, I think it's a bit aggressive to assume that will happen all this year. This will take several years. Plus, it shows NO APPRECIATION whatsoever for the next 30 years. This calculator is all wet. It is literally saying that a 500k purchase will resell for 212k in less than 1 year. It may drop that far but it ain't gonna drop that fast.

keith said...

here's some info from cepr from the calculator

This calculator compares the cost of owning a home relative to renting for a potential new homeowner. The Housing Cost Calculator reports the "Net Cost of Owning" -- the expected amount of additional cash available to a renter compared to the amount available to a homebuyer who buys a home today and sells the home at a specified time in the future. The calculator takes into account the unprecedented run-up in real home prices since 1997.


Appreciation:

Historically house prices have moved in step with the prices of other goods and services, like food, cars, and energy. The last eight years have been unusual since house sale prices have on average hugely outpaced the rate of inflation in other items, although there are large regional differences. No economist has been able to identify any underlying factors of supply or demand that would explain the sharp run-up in house prices. In the absence of fundamental changes in the housing market causing higher prices, it is highly probable that there is an unsupported "bubble" in the market-- similar to the tech stock bubble of the late 1990s.

This Housing Cost Calculator assumes that house prices again follow their historic pattern of just keeping pace with other prices. This means that those areas that have seen a sharp run-up in house prices will see a sharp correction. For simplicity, the calculator assumes that this correction occurs over the period that the person expects to own the home. This assumed timeline may be too quick if the intended period of ownership is very short. On the other hand, it is also possible that prices will over-correct, with houses selling for less than their long-run values for a period of time, as happened with many tech stocks after the collapse of the stock bubble.

This simplification misses many specific factors affecting the prices of a particular house. Some areas have simply become more desirable places to live during the last eight years, and therefore some of the increase in house prices in these areas will likely remain. Within metropolitan areas there will be important differences between neighborhoods, with some areas rising in price relative to others. Finally, a specific home may have features that cause its value to rise relative to other homes in the neighborhood.

In short, the Housing Cost Calculator assumes that the path for all home prices, from 1997 until the owner's projected sale date, will follow the historic average path of home sale prices nationwide. In fact, the prices of some homes will rise more rapidly than the national average, but the price of some homes will also fall relative to the national average.

The calculator assumes that house prices will drop by the amount that they have risen in excess of inflation. For simplicity, this is assumed to take place during the time that a home buyer is holding the house. It may take longer than that, but there is no way of predicting how long it will take for the bubble to deflate. Since house prices have not, over the long term, risen faster than inflation, there is every reason to believe that the bubble wealth created over the last eight years will disappear. The calculator therefore takes into account the expected losses for potential home buyers at present, assuming that the bubble-inflated prices return to normal while they are still holding the house.

sixpercenter said...

Entered the info for the approx $600k house I rent in Washington DC. I'm not really sure what it's worth since the 75th percentile median is down 12% (nominal) since I moved in.

It assumed I'm paying $3600 in rent. Not even close. I'm paying $1600.

I keep thinking of the 89-96 crash. If this pattern repeats I have to wait another 5 yrs before it makes sense to buy.

Anonymous said...

17 years for the average secular bear market, not counting the price needed to pay taxes that doubled and tripled on tomatoe producers gardens

Anonymous said...

and not including tomatoes or taxes, at 17 years one could assume a rise from a bottom, no one notices,unless one is political enough to hinder taxations on the stolen assets

Anonymous said...

bled blind again with taxes, and not the 74% rates of the 70s

Anonymous said...

Speculators & Flipers:
Go over to housingdoom for a little math lesson on renting out the house(s) you're stuck with.

http://housingdoom.com/2007/02/20/the-cost-of-renting-out-the-house-for-awhile/#more-496

keith said...

Forget the calculator all you really need to know is that rental income is only about half of homeownership expense on the same damn property in many cities.

Now that homes are DEPRECIATING, not APPRECIATING, there is absolutely no sane reason to buy a home today

Prices are going to come down the point where rental income would exceed ownership costs. At that point, the crash will be over, and it'll be time to buy again.

I Love Broadband over PowerLine said...

Home Depot profit falls on housing slowdown
Tuesday February 20, 9:31 am ET
By Karen Jacobs

ATLANTA (Reuters) - Home Depot Inc. (NYSE:HD - News), the world’s largest home improvement retailer, posted a 28 percent drop in fourth-quarter profit on Tuesday as the weak U.S. housing market depressed sales.

http://biz.yahoo.com/rb/070220/homedepot_results.html?.v=5

mnhp said...

In the absence of fundamental changes in the housing market causing higher prices...

I tend to think the "fundamental change" was outsourcing jobs and replacing that income with capitol gains.

For many, higher resale probably allowed them to upgrade at very good price. Many on this blog claimed to put their windfall into CD's, another way to earn money without working...

Big Cheese said...

I think housing prices will actually stay totally flat, however the dollar will continue to lose value and inflate so that in real purchasing power, the house price is half current values.

So how should we be storing our cash? Gold Bars or barrels of Oil?

-Big Cheese

Agent #777 said...

I was chomping at the bit to make the points in comments 1 and 2, but obviously they were already made. One other big thing I would add is the opportunity cost of the down payment. If you have 100k to put down, you can make 5% interest or about 416/month on that money if you rent, or you can make said down payment. Also, why is the security deposit being added BACK, when no adjustment is made for it to begin with? To me, the only thing this page does right is uses a reduced property value, but of course this is completely subjective too. Honestly, I could have done a better computation at 10 years old.
Keith's first comment just reiterated what was on the page concerning the possible reduction in value, but did nothing to answer the concerns listed.
Keith's second comment is more of what he does best - get to the point in a hard hitting manner :)

Veronica Lodge said...

Traditionally, over the long haul, annual home price appreciation accumulates at the rate of inflation plus 1%. Home prices in bubble areas must eventually return to their basic, fundamental values.

Now that bubble-mania has subsided, the perception of investors and speculators is that real estate is played out and fundamental values have returned. Of course, we are now seeing a dead cat bounce as home debtor wannabees enter the market after the first 10% drop in prices. They have been assured by the National Ass. of Realtors that the price correction is over and that real estate prices will surge up once again.

Now, the real estate crash can begin in earnest.

FUNNOMINAL said...

Keith and the Housing Panic Blog are the best.
Have you thought of matching the chronology of prior info on here vs the constant idiocy we have read in the MSM? What a time line of truth vs injustice!
Also the other housing blog sites constantly fall by the wayside or like Ben Jones's 'illustriously pompous' site become even MORE BORING!!
Keith on keeping on!

Joey Wadd said...

The calculator is way off. I pay $1350, the calc says 2400. There are NO rentals in this area for $2400! Top rent is $1500, set by the the low pay in this area.

Frank said...

The Orange County Register, surprisingly, ran an article in this past Sunday's paper about why renting is better than owning right now. I especially liked this part:

Myth: Renters throw their money away.
Fact: So do owners for the first 5-7 years because 100% of those payments go to interest and no principal is paid down.

I snagged a $1.2M house in Newport Coast on a $3,500/month lease ... nice.

Jim said...

I gree 100% with anonymous #2 way above. Whether I put in 1, 5, 10, 20 or 30 years the appreciation is ALWAYS -61%. What other biases may be programmed in?

On a side note, on Saturday night Discover channed had a program called something like "Flip that House Reviseted" where they showed what happend after the perky realuhter (why do they always say it that way?) left with the "profit" already in the bag. Of the 3 or 4 they profiled only 1 made a profit (something like $5,000 on a $400,000 flip) and the last one was "after 8 weeks, Barbie and Ken have lowered their asking price 6 time for a total of $50,000 and have had no offers. If the house doesn't sell in the next 2 weeks they will have to refinance in order to be able to pay their bills."

Wahoo! It's aflipper's life fer me!

Steve Cohen said...

I don't think I am either a die hard gotta own or a die hard gotta rent person, but one element left out of the calculator is moving costs. Presumably you have to pay the movers whenever your landlord either raises the rent too high or does not offer a lease renewal.

That's kind of a bummer being a nomad

Frank said...

On the opportunity cost of the down payment, let's not forget the entrepreneurial opportunities lost. If I had "bought" a house in 2002-2003 instead of using my savings to start my business, I would be a homedebtor with a job instead of financially free like I am today.

Also, the calculator fails to consider that higher income individuals do not get the mortgage tax deduction. It phases out at $135k income for singles and $300k income for married couples. Many people don't get the so-called "tax break."

Mark in San Diego said...

Keith,

This could not come at a better time - I just signed a lease starting April 1 for a 2/2 condo with a terrific view in one of downtown San Diego's best buildings - pool,spa,gym, etc. . .I will pay the grand sum of $2500 a month. . .here is the breakdown - similar condos are on the market (not selling) for $800K or better. . .(I am a cash buyer from previous home sale)

Assuming a modest 5% (California Tax Free bonds) on 800K = $40,000 a year income on the money I would have to use to buy. . .condo fees - $700 a month, and property Tax = 10,000 a year. . .Grand total would be $58,500 a year to own a DEPRECIATING condo . . vs. $30,000 to rent. $28,000 in my pocket each year, and I can KEEP my $800K. . .

Buy Hi Sell Low said...

The calculator is faulty on so many levels. I appreciate what it is trying communicate but it is trying to pass itself off as being complete when it is nowhere close.

People will not be able to sell after 5 years if they are that far under water, they will have to default, which really causes the numbers to blow up.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

This thing isn't even remotely correct.

Anonymous said...

and mind you rental prices are going to fall too. so the rent vs own decision is even more skewed.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...

Holy Sh**
I live in LA a house costa about 730K and to rent it I save over 400K yeah, I like to rent.

Anonymous said...

"I snagged a $1.2M house in Newport Coast on a $3,500/month lease ... nice. "

Go for $2,750 on the next lease...

Anonymous said...

You can't assume appreciation or depreciation on any home. Noeone can predict what will happen to the value of a home. Look at the numbers today. Renting makes sense when the the rent would cover the basic costs (mortgage, taxes & insurancd).

Many different variable can affect the potential of any home and none of us have a crystal ball.

Anonymous said...

"So how should we be storing our cash? Gold Bars or barrels of Oil?"

Just throwing this out here:

http://jessel.100megsfree3.com/goldoil.png

anon666 said...

I've checked out other (better) rent vs. buy calculators recently and I've discovered that they are very sensitive to your assumption of house appreciation. Generally, if the house appreciates more than 3%/year, then the calculator always shows that it is better to buy. If the house depreciates, even by a little, under no circumstances does it make sense to buy. A depreciating house eats up all you tax advantages and nullifies any principal equity you have in the house.... it's a big no brainer.

Anonymous said...

Wait wait wait - that calculator is showing anywhere from 50% - 60% drop in resale value NO MATTER WHAT TIME FRAME I put in. Whether 1 year or 30 years, it shows the same projected resale price.

They clearly state this assumption and the limitations of it on their website.

I gree 100% with anonymous #2 way above. Whether I put in 1, 5, 10, 20 or 30 years the appreciation is ALWAYS -61%. What other biases may be programmed in?

While that is a bias, their research shows that houses in your area are 156% overpriced A 61% correction would compensate for that.

The length of time is irrelevant. They have no idea how fast the return to the norm will be and they state that.

Also, keep in mind that the 61% is inflation adjusted so the value of the home after 30 years will be higher than the value today .... just 61% lower in inflation adjusted terms.

To me this is where it is powerful. If houses increased very slightly over 30 years but lost 61% in real terms, their analysis shows that you will still lose a lot of money. This is very interesting.

People will not be able to sell after 5 years if they are that far under water, they will have to default, which really causes the numbers to blow up.

No calculator could predict these type of things. It also can't predict that we might have extreme inflation (the HH best outcome) or whether we will have another bubble in 15 years that will bail out today's HH's.

Anonymous said...

That calculator is garbage, plain and simple. Houses are depreciating in many markers, but it takes some wils stretch of the imagination to believe that they will be down 50%+ in 20 or 30 years.

Also, it doesn't take rent inflation into account vs. a fixed mortgage, or opportunity costs of down payment (as another poster mentioned).

GrandInquisitor said...

I put a lowball offer on a home in NJ 2 weeks ago. The home was listed at 450 and I offered 365. We never came close to making a deal. They came down to 420 and I went up to 385. That's where it ended. They originally listed their home at 515 ONE YEAR AGO. I sure hope we haven't bottomed, but their refusal to go below 400 is discouraging. I couldn't find anything else in the area to bid on. On the bright side my lowball offer reduced their Zillow estimate. So go out there and lowball people. With Zillow it seems that YOU can actually move the market!

Anonymous said...

I save almost 2000 per month by renting in DC area. And my house is very updated, cathedral ceilings, 2 decks, backs to wooded hill on Rock Creek Park, and 8 minutes to downtown Bethesda.

Anonymous said...

Some folks I know recently placed their house on the market. They are going with Zillow for pricing (to the penny!) but realize they may not get the price. Lower quick or lower more latter folks.

Anonymous said...

I ran some numbers for 25 year projections; if I leave this bubble market or prices drop significantly before I buy - I will save an extra 1 - 4 million in 25 years.

The troll said...

Once again Keith is an idiot. Your analysis is comparing REAL home cost vs. NOMINAL rent. If you add 3% inflation a year for 5 years, you would add 16% of 500,000 back to your home cost. Also, you said rent would be 1200 a month to rent. 1200 a month to rent for 5 years is 72,000 and not 30,000. Your rent assumption is 500 a month and not 1200. And, by owning a house, you have an opportunity cost (or benefit in this case) of not renting so the 72,000 should be ADDED back to your cost.

How the hell do you people listen to such a mathematical retard like Keith?

Oh, and for you people that can't understand why they have such a large real depreciation no matter how long a time period you use is because they assume 0% real appreciation after home price have corrected.

a.creampuff said...

There are family neighborhoods where no one rents. Other than a rule of thumb, is the rent comparison apt where you can't actually rent?

Anonymous said...

The calculator said my home would depreciate by 16%. That would make it cheaper than labor + materials. I think they pulled these depreciation numbers out of their ass.

Anonymous said...

Here is a better Rent to Own calculator, more realistic:

http://pacificbeachbubble.blogspot.com/2006/12/my-very-own-rent-vs-own-calculator.html

Anonymous said...

Also, the calculator fails to consider that higher income individuals do not get the mortgage tax deduction. It phases out at $135k income for singles and $300k income for married couples. Many people don't get the so-called "tax break."

WTF are you smoking? There is no income limit for tax deduction on mortgage interest you imbecile.

Anonymous said...

it takes some wils stretch of the imagination to believe that they will be down 50%+ in 20 or 30 years.

Why? If the house is 100% over the historical norm, why is it so suprising that it will return to the historical norm?

I think you all do not understand this calculator. The "down 50%" is inflation adjusted or in real terms. They're not saying your house will decrease 50% in nominal terms after 30 years.

Let's say inflation is 3%. Your house increases in value 1% per year. The real value of your house will decrease almost 50%. That's exactly what this calculator is saying. Please read the info on the calculator.

The calculator said my home would depreciate by 16%. That would make it cheaper than labor + materials.

Um, but 3 years ago it wasn't cheaper than labor + materials was it? Both are heading down and will continue to do so.

Builders were building like crazy 7 years ago when houses cost anywhere from 1/3 to 1/2 the prices today and they were making money on them.

Anonymous said...

Yeah, I live in Pasadena, CA and it says my equivalent rent is $5,600.

Ironically, if I bought an average house on my street similar in size to my apartment for $600k , and put 20% down, my opportunity cost on my 20% down is about the same as my $1200 per month rent (assuming 11.5% gain in the stock market - the long term average and 15% cap gains).

Oh yeah, then there's that $480k mortgage I'd have to carry plus property taxes and time and money for upkeep. And that's for the dumpy houses here on the east side of Pasadena, CA.

Oh yeah, then I wouldn't have the pool I have at my apartment or the landscaping or the surf vacations to Costa Rica cause I'd be cash strapped like everyone else

Here's to being semi-retired in 6 years at 42.

RENTING IS PARADISE!!!!

Anonymous said...

RENTING IS PARADISE!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Anonymous said...

at those price appreciations, all of us will be asking those ceo wage numbers like wall streets, just to keep or own a roof over ones head, is that normal inflation, cause id like 100 mill plus a year, that buys nothin? horsersheets

Anonymous said...

"It's always about P/E" is a silly statement. P/E in real estate is a factor, but it's not entirely about that. This is equivalent of saying that every company on Nasdaq of certain sector should have the same P/E and thus some are heavily undervalue and some are overpriced. Many people have followed these P/E inefficiences trends straight to rags.

Also, dont forget, 95% + of Homeowners are, excuse my french, total F**king morons that will never go through the math and will continue spending every single cent from their two full time jobs on feeding the house.

Robert said...

As a real-estate investor renting out a few houses (all below median for their area, but nice nontheless) I tried it out on my houses. I must be getting good rents because those renters would be better off buying. One renter who left last year was in the house for 14 years, making the mortgage payment for me for the last 9 years that I owned the house. So: using the formula of house price/14 = annual rent, then current market value is reflected in the rent. I would consider this a frothy, if not bubbly market. But using the relative cost of renting, they have not bubbled too high, so they do not have too far to go down.

My advice to any prospective investor out there is that if you cannot make the payment out of the rent, then it is not a good investment, because you will always have extra-ordinary expenses every few years.

Anonymous said...

Keith,
You are out of touch!
Rents in scottsdale are through the roof!

My nasty 1 BR went from $525 to $800 and headed to $850-900 over the past 3 years.

A house for $1200? You must be smokin'!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

Costa Rica said...
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