Real Estate: Renting Is Better than Owning

Business Week reports:

As for the market conditions in southern California, Dr. Housing Bubble has run the numbers himself and produced this analysis on his popular blog. And his conclusion: Despite the recent drop in prices in southern California, you’re still better off renting in many markets there. It’s still not even close. And I suspect in bubble markets like Washington D.C., Boston and south Florida, that’s going to be true for several more years.

Here’s a synopsis of Dr. Housing Bubble’s analysis:

The Good Doctor assumes our hypothetical buyer is looking to purchase a home in SoCal for $500,000 – in other words, a garden shed. The equivalent of a similar house that’s being offered for rent by its owner (probably someone who bought at the peak of the bubble and is underwater) is $2,200 a month. Buyer would put 5% down. And under the alternative scenario, the buyer rents instead and puts the down payment and the monthly “differential” – the difference between the rent and the $4,057 a month mortgage payment – into an investment earning 7%.

He assumes that the house appreciates an average of 2% a year, which he admits could be optimistic given that “many bears are predicting nominal losses in the double-digits.” But lets give housing bulls the benefit of the doubt for the moment.

After five years, here how the two alternatives stack up:

BUY: Amount of home equity is $56,379.
RENT: Value of that investment account is $106,843.

So it’s better to rent over a five-year horizon. And if home prices continue to decline, that $56k in home equity could be wiped out.

In fact, Dr. Housing Bubble concludes that you’d have to own the home for 17 YEARS before the return from homeownership would match that of renting-and-investing.

BUY: Amount of home equity is $320,859.
RENT: Value of that investment account is $324,517.

Who's to say whether you can get a mortgage with 5% down?