Rent or Buy?
Saturday, May 6, 2006
Jim Sweeney, a computer database administrator and self-proclaimed "numbers guy," watched the value of his Arlington condo double in three years and made his move: He cashed in and went back to renting.
Around the same time last year, Karen Martin, a scientist, was doing her own math in a two-bedroom apartment in Mitchellville and came to the opposite conclusion: It was time to buy. In February, she bought a three-story townhouse in District Heights.
As the housing boom cools, tenants and homeowners across the region are crunching the numbers and facing confusing questions: Will home prices go down? Will rents go up? Is it better to buy now or wait?
There is no simple answer, because whether it's better to pay the landlord or the bank depends on individual finances and lifestyle desires. But one thing is clear: After five years of double-digit growth in home values, paying rent has become an increasingly attractive alternative to homeownership in many parts of the country, challenging long-held notions that to rent is to throw money away and to buy is to build for the future.
In San Francisco, Honolulu and New York, the cost of owning now outweighs renting, according to an analysis by Michael Sklarz, head of analytics at Fidelity National Information Services. Homeowners in Houston and Phoenix still fare better than renters, while Washington, Seattle and Los Angeles are right on the cusp.
In the Washington region in 2000, the owner of a home that cost the median price of $161,400 paid $816 a month, Sklarz found. The median is the point at which half the homes cost more and half less. That home would have cost $1,344 a month to rent, or 65 percent more.
As prices soared, that gap narrowed. By 2005, the owner of a home that cost the median of $412,600 paid $1,720 a month; the renter paid $1,899, or 10 percent more, according to data Sklarz analyzed for The Washington Post. Generally, economists expect gains in home values to peter out and rents to tick up.
Sklarz's calculations assume the homeowner took out a traditional 30-year fixed rate mortgage with 20 percent down payment, paid annual property taxes of 1 percent of the total value of the home and takes a mortgage-interest tax deduction equal to 25 percent of the payment. To calculate rents, Sklarz used apartment rental figures tracked by the Housing and Urban Development Department, and estimated that single-family houses would fetch 60 percent more. He didn't include insurance costs in the equations.
While the buy-to-rent ratio has narrowed in recent years, Sklarz said that the numbers are still in line with previous market highs; despite a record five-year boom in prices, historically low interest rates have kept monthly mortgage payments down. "The story here is that it still makes economic sense to buy," he said.
Of course, he said, his scenarios are based on the median home price. That means that plenty of other houses cost a lot more, and many buyers put down less than 20 percent, which means their monthly payments are higher.
To many local tenants and homeowners, the housing market already seems out of whack.
Ben and Julie Feldman were on their honeymoon last year, relaxing on a beach in Costa Rica, when the next real estate move became clear to them. "I said, 'You know, the market is peaking as we sit here,' " Ben Feldman recalled telling his wife. "We gotta get home and sell."