Financing in 60622>Question Details

lebron james, Home Buyer in Chicago, IL

New York Times Tool for Rent vs Own

Asked by lebron james, Chicago, IL Mon Jan 17, 2011

I am putting together a spreadsheet that has a very similar goal to the following new york times tool: http://www.nytimes.com/interactive/business/buy-rent-calcula…

I'm doing this because I want to know exactly how the calculations work and also because we are currently assessing whether or not to rent or buy. My first question about the New York times tool is about the Lost Opportunity Costs section. I'm wondering if I really have to track this item in my spreadsheet. If I just take the Net Present Value of all cash inflows and outflows for both scenarios, won't the difference between the two numbers tell me what I need to know? For example, say the NPV of renting for 4 years is -$30,000 and the NPV of buying now and selling in four years is -$35,000. The diff would tell me that, over time, I would be saving what is equivalent to $5,000 today. Hopefully, this question makes sense.

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Lookit, all-star, you get that ankle healed, and stop worrying about real estate!

Anyway, LeBron, here's the problem - it's all a guess. We don't really know what rents will do - although, of course, if you sign a long enough lease, you can be locked in. We don't really know what home values will do - we can guess, but we don't know, and we don't know what interest rates will do.

You can - and will, as so many people with eight open Excel windows do - get so tied up in the accounting aspect that you will forget that home price changes are not constant - they are highly variable - and you are asked to make these assumptions about the next thirty years.

Basically, the NYT toy says that, even if home values decrease 5% a year for thirty years, if rents go up just 1% a year it's better to own than to rent. And as a very practical matter, the earlier in life you buy, the earlier in life you can pay off the note and own free-and-clear.

For a fellow like you who moves every five to seven years, it's going to be pretty much a coin toss - we don't know what the future holds, but then again, you can afford to live any way that you want. Just make sure your new home has plenty of room for trophy cabinets.

All the best,
2 votes Thank Flag Link Mon Jan 17, 2011
Actually, there are too many variables to be considered and some of them can and will change over the course of the time frame you use. This is not exactly speculation, but not worth comparing unless the differential is huge. 5K would not be huge.
1 vote Thank Flag Link Mon Jan 17, 2011
Lebron,

You're pretty smart for a basketball player! You are correct in the way you are looking at your analysis. I assume you are also smart enough to factor in the tax savings of the deductions and to only look at the interest cost of the mortgage, not the total P&I payment, and you will factor in your closing costs, commissions, your downpayment and the return of that downpayment.
Web Reference: http://LucidRealty.com
1 vote Thank Flag Link Mon Jan 17, 2011
Renting is a great option, to stay liquid and snatch up a house you would want to buy and live in for longer than a typical rental. It assumes liquidity of the house for sale when in fact, between transaction costs and moving hassles and expenses this is an esoteric exercise. If you want to live spartan, you can live on the cheap and save alot of money by renting, move every year or two and fill many coffee cans with cash! NPV analysis to save $5k over 5 years and move 3-5 times during that same period? That is not practical.
0 votes Thank Flag Link Thu Feb 17, 2011
Hi-
The tool is useful, but it is only accurate for the moment or immediate time frame you are working from. As the variables change (and they will) so will the outcome.
It will be interesting to track this over the next few months, and I would also suggest you run it backwards six months if you can get the relevant data, for a specific neighborhood test it's predictions.
I do not think you can translate the result from one area to another, the pricing and sales activity has become very localized and you will need to run the calculations for the exact area you are evaluating each time.
It is a good starting point, but anything that extrapolates an outcome is fraught with inconsistency and should be taken with a grain of salt, as they say.
And yes, if you are being thorough, I think the LOC is something that has to be included in the metrics.
Most of all, the tool has limited use for most home buyers because it is incapable of measuring the value of the living experience in a certain property. The investment in a home is just a portion of the equation for most people.

Dave
0 votes Thank Flag Link Mon Jan 17, 2011
What it doesn't seem to remind readers is that even if the costs are nearly the same, earning equity in a home is a positive and can help you with many other things.
0 votes Thank Flag Link Mon Jan 17, 2011
I should add that I meant to say "I would be saving what is equivalent to $5,000 today by renting"
0 votes Thank Flag Link Mon Jan 17, 2011
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