A friend sent me the New York Times’s “buy versus rent” calculation page. The analysis shows that you can save a bit of money buying rather than renting if you are sure that you will stay in the house for five years. The potential savings are $1743 per year in a $172,000 house held for six years. I think the calculator is flawed, though, in that it doesn’t factor in the time that homeowners spend on trips to Home Depot, reading Consumer Reports, tweaking things in the house with hand tools, etc. It seems reasonable to me to budget at least 24 days per year (2 days per month) of effort that homeowners put in compared to renters, either because they are doing something that a landlord and his/her maintenance crew would do or because they are doing something that simply doesn’t get done in a rental. A person who owns a $172,000 house might have the potential to earn $20 per hour after taxes. Figuring an 8-hour day that’s $3840 in personal labor that the homeowner puts in. Now the house has to be held for 14 years to break even with the rental.
The selling costs of the house don’t include the potential for it to be vacant for six months, with the former owner paying about $7000 in rent somewhere else. That means the house has to be held for 15 years to break even.
Then consider the reduced flexibility of the homeowner. He or she may be spending more time commuting because it was too expensive/burdensome to move after taking a new job within the same general area (see “The American Dream or the American Delusion”, a working paper from University of Pennsylvania where the author found that “female homeowners spend less time on enjoyable activities, such as active leisure). He or she may turn down a better job in another city. If homeowners are commuting 20 additional minutes per day, that’s about 83 additional hours per year, $1666 at $20 per hour. Now the house has to be held for 19 years. If the homeowner waffles for five years before moving to a state with better economic opportunity (think Michigan to Texas), giving up $5000 per year in income, the $25,000 takes another three years to recover. Now the house has to be held for 22 years.
Homeowners in states with big unfunded pension liabilities (report), which is to say nearly all states unless investment returns end up being 8 percent/year for the next 50 years, could find themselves with dramatically higher property taxes over the required 20-year holding period. Renters will feel the property tax pain too, albeit indirectly, but will have the flexibility to escape. I’m not sure how to factor in state/local insolvency and accompanying property tax risk.
Obviously if you love being a homeowner, enjoy trips to Home Depot more than playing soccer or going to movies with your kids and friends, and are very picky about wall colors and appliances, it might make sense to buy. But I don’t see how it can be justified on rational economic grounds, contrary to the rosy “just hold it for six years” picture painted by the New York Times.
[Disclaimer: I am a homeowner, but I don’t think that it has saved me money or made me happier. I did it mostly because of a dog (who ended up making me happier and making me a lot of money too since he spurred me to start my own company).]