The Fiscal Times had a piece the other day reviving the good old rent vs. buy meme. The new angle was that Zillow has updated its method for comparing the costs of renting and the costs of buying and uses it to produce what it calls a ‘Breakeven Horizon.’ Besides sounding vaguely like the title of an old sci-fi movie, beyond the breakeven horizon is where buying a home makes more sense than renting and in theory the less time to the horizon, the more the market is tilted towards buying.
Now I have to admit I was intrigued with the thought that Zillow had re-examined their methodology because as I have written about earlier, their previous calculation ignored the real costs of maintenance, repairs and saving up for replacing big expensive things like the roof, the furnace and the driveway and that is a pretty big chunk of money over time. Industry figures for repairs and maintenance on single family housing run from one to three percent of the home value. Have a look at the chart* below to see how much a relatively modest 1.5% adds up to over time.
There have been a number of reports recently claiming that renting is more expensive than buying a house. This is a great thing as everyone involved in selling, building and financing houses would tell you, especially if it were true. Unfortunately it is not for a variety of reasons, one of them being that owning the home you live in just isn’t that good of an investment, but we’ll get to that in a moment.
The first hurdle is the challenge of amassing the 20% down payment. On the average US home price of $242,300 the downpayment would be $48,460. That is essentially one whole year’s worth of the US median income of $51,413, so the question is how long would it take someone to save that much? This question is nearly always ignored in these comparisons. But say we all have a rich relative who leaves us the downpayment in their will, it’s all good after that right?
Some of these type of reports simply compare the average local rent to the mortgage payment for the area’s average home and therefore can be discounted out of hand. Others include taxes and insurance which is slightly better but they are still missing a very big piece of the cost of owning and operating a home; repairs and maintenance. Continue reading Rent Vs. Buy And The Great Myth of Homeownership as an ‘Investment’