Rent or Buy?
Decision Depends on Geography, Finances and Lifestyle

By Tomoeh Murakami Tse
Washington Post Staff Writer
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."

And so they sold, at a 150 percent profit, and began renting in October.

Their thinking went like this: The 900-square-foot condo they owned in Dupont Circle would have rented for $2,000 a month. But to own it, a buyer would need to pay about $3,000 to service the monthly mortgage. "It's just totally disconnected," said Feldman, 40, managing director of Natsource LLC office in the District, an environmental asset-management company. "It just seemed unsustainable."

The Feldmans wanted to move anyway to a larger space, but rather than buy as they had originally planned, they chose to rent. Buying did not seem smart in an uncertain market.

They now pay their landlord $3,000 a month for a 1,400 square-foot condo, also in Dupont Circle, with a private rooftop deck. By Ben Feldman's calculation, if they were to buy it with no money down, they would be paying $1,000 more a month.

Sweeney, 35, said he realized at the height of the market frenzy last summer that the numbers were no longer adding up for him.

When he decided to buy his two-bedroom, two-bath condo in Falls Church in 2002, Sweeney estimated that he could, if he wanted, rent it out for about $1,200 a month, or about 1 percent of the $125,000 purchase price. That was reasonable, Sweeney thought, an indication of a market in the balance. But home prices kept going up. And up.

"The discrepancy between ownership and rent just went bonkers," he said. "I realized I could move out and take the cash and invest it, and defray the cost of living somewhere else."

So in June, Sweeney cashed in. He sold his place in three days, for $280,000. "I just said: 'This is weird. Things just don't go up 100 percent,' " he recalled. "Weird things make me scared. I ran away."

For Martin, 36, the tipping point came last fall after the landlord of her gated high-rise apartment building in Mitchellville told her that the rent would be going up again. That meant Martin, who wanted to switch to a month-to-month lease, would have to pay $250 more, or $1,640 a month.

"The rent was getting so much more expensive," she said. "It just wasn't a good trade-off anymore."

So she bought a townhouse for $282,000. Her monthly mortgage payment is about $1,800.

Both Martin and Sweeney believe they made the right choice.

Sweeney has taken his winnings and invested in stocks and money market funds. Long term, he expects annual returns of 8 percent, or almost $1,000 a month, although he said he is doing better than that at the moment. He is now paying $2,000 a month for a two-bedroom, two-bath rental unit in the District, where he enjoys walking to places.

Martin, on the other hand, said the $160 extra she is paying every month is well worth it. Her townhouse has 600 square feet more of living space than her apartment did, as well as a patio, outdoor deck and small back yard. She has taken up gardening.

For both, calculations went beyond the purely financial. Renting, Sweeney said, has its pluses, such as not having to worry about fixing a broken appliance himself.

For Martin, owning her own place has brought numerous benefits -- for one, the freedom to decorate as she chooses.

"I don't have to have white walls. You can paint everything," she said. "Every day I go home, I think: 'Oh, all this is mine. I can walk freely, decide what I want to change next.' "

Martin now attends homeowners meetings to learn what is going on in her neighborhood and find out when local government meetings are scheduled. "You start to care because you are part of the community," she said.

It was the intangible that led Cheryl Skrzat, 28, to decide to plunge into homeownership.

She and her boyfriend, Justin Anderson, are both renting now -- she in a District apartment building, he in an Arlington house. They pay a combined rent of about $1,700 a month. The couple had discussed getting married and eventually buying a house, but urgent real estate choices had to be made when Anderson received a notice in March to vacate the house. It had been sold to a developer who wanted to tear it down.

Over the next week, the two discussed how they felt about living together before marriage and how they would handle lifestyle changes that would come with becoming homeowners, said Skrzat, who reached out to home-owning friends for advice.

"My biggest question was whether it was a nice feeling or if it was a big pain in the neck," said Skrzat, an editor for a daily health-care publication. Her friends told her it was worth it. "That resonated with me." So now they're looking seriously for a three-bedroom house in Fairfax County.

For Anderson, 29, a technology consultant, buying a house meant building equity, taking advantage of tax breaks and achieving "the whole American dream" of homeownership. Besides, he said, "I had just gotten kicked out of my house and I kind of wanted a little more stability than that."

Because of the slowing market, the couple decided they want a place they could stay in for up to 10 years even if it means their mortgage payment would be double what they are paying in rent. That way, they figured, even if the value of the home dipped a little, it should come back up in time for them to sell.

Skrzat said she had a wave of panic after meeting with the loan officer. Would they be house-poor as newlyweds? Would there be any money left over for vacations?

But in the end, Skrzat said, they wanted to start their lives together in a new place that they could call their own.

"It felt right for us," she said.