Housing & Mortgage
Rent vs. Buy Calculators: With Rates So Low, They Might Be Useless
But buying in some depopulating markets may be a bad idea
Rent vs. buy? It’s an age old question in real estate. And one that never seems to have a clear answer.
Where any one person lands in that debate often boils down to their financial beliefs. Owning a house, one side rightly argues, builds wealth through building equity. Renting, the other side rightly counters, avoids all the costs that homebuyers never really factor into their equity calculations.
In an effort to address that, all manner of rent vs. buy calculators have cropped up. Problem is, these calculators don’t always calculate the same results, even when given the same inputs.
Consider, for instance, a $320,000 house (the U.S. median) purchased with a 30-year mortgage at a 3.25% rate. Freddie Mac’s calculator says a homebuyer will save $56,600 over the average 13-year stretch most own their home. Realtor.com, using the same inputs, calculates the savings at more than $95,000. NerdWallet claims a homeowner saves $76,000.
We live in an unusual moment in financial history, with abnormally low interest rates and savings rates. Mathematically, that favors home buying since interest costs are lower and returns on savings (which would benefit a renter) are miniscule.
If we crank up the interest rate to a historically normal 6.5%, and push savings rates to a 5%, then Freddie Mac calculates a buyer comes out ahead by almost $12,000, while NerdWallet says it’s just under $37,000. Realtor.com, however, calculates that buying wins out by more than $135,000 — which underscores just how widely these calculators can vary.
The New York Times’ otherwise spiffy interactive rent vs. buy calculator doesn’t show how much you’ll save with either option. Instead, it takes in all the same data but calculates a number below which it makes sense to rent. So, for instance, with the same basic inputs as above, the Times determines “If you can rent a similar home for less than $1,278 per month, then renting is the better buy.”
So, the calculators are endlessly entertaining but perhaps not so useful, especially in the current environment. There are some other things to consider if you’re mulling buy vs. rent:
Job-growth markets. Cities that are attracting population tend to be attracting jobs, which suggests they might be better for homeowners. Housing demand keeps rental prices elevated, and generally pushes home prices higher at a pace faster than the national average. (Of course, as with so many facets of real estate, there’s another big caveat here: housing supply. Too much supply, even in a strong market, can weigh on prices. Too little supply, even in a downtrodden market, can undergird prices; think of the West Coast.)
Caveat aside, Census Bureau and Bureau of Labor Statistics data point to these as job- and population-growth cities:
Austin, Dallas and Fort Worth, Texas, and surrounding suburbs
Cape Coral on Florida’s west coast and Orlando in central Florida
Phoenix and its suburbs Tempe, Mesa, Gilbert and Scottsdale
Denver and its suburb Greeley
Atlanta and its suburb Gainesville
Of course, the key variable here is price. Earlier this year, Fitch Ratings estimated that the U.S. real estate market as a whole was about 1.5% overvalued. But individual markets, including Austin, were overvalued by at least 10%. Overpaying even in a good location can undermine the economics of home ownership.
Population-loss markets. Cities that are losing population are often losing jobs as well, so they tend to favor renters. Slowing or declining demand for housing keeps rents relatively low. It also means home prices aren’t likely to rise much — and are more likely to decline — particularly in inflation-adjusted terms. As such, you won’t have the home price appreciation to cover years of carrying costs such as insurance and maintenance.
This list of cities includes:
Chicago and nearby Gary, Indiana
Detroit and nearby Flint and Saginaw
As a renter, you’ll forsake the forced savings, but if you consistently stash away money in a savings or investment, you will likely do better than having owned a house and footing all its required expenses.
When it makes sense to rent
The obvious answer is that it almost always makes sense to rent if your time frame is five years or less, because in such a short period your home’s value isn’t likely to rise fast enough to offset the various costs for buying, selling, insuring and maintaining the property.
But, maybe, the real answer is this: Rent vs. buy is irrelevant. That’s because at its core the comparison isn’t a money issue. It’s a lifestyle issue. Investing in a house is different from buying a home.
Buying a home is choosing to live inside your investment, which means you are, in effect, both landlord and renter. And in the end that’s likely to be a wash, at best.
Whatever calculations you come up with today to compare the all-in costs of buying a house against the terminal value when you sell that house, just know that your input costs will likely be very wrong. Which means your calculations are moot.
Beyond the principal and interest payments of a fixed mortgage, a homebuyer cannot know with any meaningful accuracy any of the other costs they’ll accumulate over the years. Property taxes rise. Insurance premiums change. Unexpected maintenance and repair costs crop up. Remodeling costs years down the line are unknowable.
So, buy a home because you want the lifestyle of a homeowner, and the freedom to do with your house whatever you wish — and you accept that it’s likely to cost more in the end than you ever expected.
Otherwise, rent and stuff your savings into investments.