Like anything else in real estate, the decision whether to rent or buy a home usually comes down to a couple of factors — location and cost, with a little emotion (check that, a lot of emotion) thrown in to the mix. When the cost of housing is too high, people choose more often to rent, and when prices go down they scramble to buy while homes are more affordable.
Back during the administration of George W, his big thing to boast was the rise in homeownership, which we now know came at an extremely high cost — one that most likely ignited the Great Recession. People bought homes because lenders told them they could afford to using very dicey and exotic (subprime) loans with either no proof of income, or paying interest only with a balloon payment at the end. A lot of those are the same people either facing foreclosure today or have been foreclosed on already.
Some of them have been forced to move in with family, while others can still afford to rent a nearby home or apartment. Now the tide appears to be turning, with prices going up in some markets where low levels of housing inventory combined with historically low interest rates are making for the perfect storm.
And the question once again becomes: Should I buy now or rent?
Although fewer foreclosed homes are going back to the lenders and becoming REOs, there is an abundant supply of short sales in most markets around the country and more traditional listings are coming back in some markets where sellers have become more realistic in their asking prices and are selling their homes in good condition.
In a recent article, Stan Humphries, chief economist at Zillow, discusses how most industry analysts usually depend on a purchase price/rent comparison when determining when to buy versus renting. He correctly went on to note that more variables should be considered when making this important decision, announcing at the same time Zillow’s new “Breakeven Horizon” tool, which can assess data down to the city and metro level to determine how many years it will take before a home becomes more financially sound as a purchase than a rental.
While this tool is impressive for sure, the question is whether your average potential homebuyer/renter will find such a tool useful, or is it just another econometric exercise that is sure to impress Humphries’ colleagues.
To be sure, Humphries’ added some very relevant factors into his economic blender:
- Time horizon
- Future prices and rents
- Tax deductibility
- Maintenance costs
- Transactions costs
The graph it produces is very cool. And this tool may be a great help to real estate investors who do more advanced research before buying properties to turn into rentals than the average potential homebuyer will do.
The results may astound you. But whether it makes a difference to the family looking for their next home (be it a purchase or a rental), we’ll see.
Would this be a useful tool for you as a buyer/renter? Could you see this as useful if you’re a realtor analyzing your listings? And how about you investors out there? Do you think this could be a useful tool to have in your arsenal?
Let us know what you think?
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