Making the Move Into Home Ownership
If you are a First Time Homebuyer I have some Good News and some Bad News for you:
THE GOOD NEWS: There is a ton of information available to help you make the right decision!
THE BAD NEWS: There is a ton of information available to help you make the right decision!
The real problem is sorting the good information from the irrelevant.
Many websites feature a Rent vs Buy calculator, if you have tried them you know by now that Buy wins every time.
Yes, there are a lot of good reasons to buy, but not all will apply to your life circumstances.
But how do you know if the home your considering is a good deal? Well you can always compare by cost per square foot (The new hot button on House Hunters). But what if all the listings are overpriced? The cost per square foot will be inflated as well.
Here’s a little tool I picked up from the New York Times that will help you compare the cost of buying a home to the cost of renting. It was written by David Leonhardt, a card carrying renter.
Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check. Buying on the other hand, involves multiple expenses some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest (The mortgage-interest tax deduction reduces this last cost but doesn’t eliminate it. Same is true for property taxes).
Of course owning also brings benefits that have nothing to do with money. You can settle into YOUR home, repaint the walls and redo the kitchen just the way you like it.
If you find two similar houses, one for sale and the other for rent and divide the sale price by the annual rent, you can call the result the Rent Ratio. That concept probably sounds familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio – a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like the P/E ratio, the rent ratio provides something of a reality check.
Historically the average rent ratio hovered between 10 and 14. In the last few years, though it broke through that historical range and hit almost 19 by the time the housing market peaked in 2006.
In concrete terms, a rent ratio above 20 means that the monthly costs of ownership will exceed the cost of renting. Anything less the pendulum starts to swing toward home ownership.
Most of the time the decision whether to rent or buy should be based above all on life circumstances. Do you expect to move again in a couple of years? or is there a good chance that you’re ready to settle in – and stop worrying about real estate for a while?
A new phenomenon is now occuring in many markets due to the high number of foreclosures. Prices of homes continue to decline while rents for single family homes are remaining constant (increasing in some areas). Many homes now rent for more than the monthly payment would be if you were to buy it (all those families need a place to rent).
Pretty simple, you can now compare the cost of renting with the cost of owning without all the clutter.
By the way, David is now a card carrying homeowner.
Greg Cook
First Time Home Buyers Network
www.homebuyerhelpnetwork.com
951-265-4532 (mobile office)
951-699-7813 (Fax)
greg@homebuyerhelpnetwork.com
It’s Too Important…DO IT RIGHT!
