Real Estate: Buy or Rent
Fashion designer Delia Seaman regretfully admits that sales at her West Hollywood
boutique are still suffering amid the recession. She has put her 1920s Spanish-style
bungalow up for sale, and after Realtor fees and closing costs, she believes
to clear up little or nothing beyond $922,000, the price she paid for the property
four years ago-- something close to the now asking price, of $999,000.
Seaman even says, her yearly mortgage payments, insurance and property taxes
has exceeded what she would have spent renting a similar home annually. According
to her the whole housing dream is kind of a joke, and says "I paid in for
four years and got nothing. I wish I'd never bought."
Seaman's property agent, John M. Barrentine, calculates that her house would
yield close to $1 million in a sale but less than 3% of that (or $30,000 a year)
in net annual rent if leased out. She would be better off selling and putting
her money into California municipal bonds.
It is socially accepted that renting is alike throwing money away. This can
be wrong, not only because home prices occasionally crash, but can be wrong
in a flat market. As it has been discovered in the past two years, house prices
do not go up forever. Earnings matter.
In terms of net rent, the annual rent a house would command is minus property
taxes, insurance, maintenance costs, losses from occasional vacancies and any
fees paid to property managers. The house you live in has slightly higher earnings
than the same one you rent out, because you aren't paying for a property manager.
Bonds do not maintain their purchasing power. Houses and stocks, in contrast,
have prices and earnings that tend to maintain their purchasing power over long
periods. when comparing bond yields with earnings yields on stocks or houses,
you need to subtract inflation from the bond yield to get a real return.
Renting tends to make the most sense in weak real estate markets. So, if you
calculate the earnings yield on a house, keep renting (or, if you own, sell)
if the earnings yield is lower than 3%. Be a buyer if the earnings yield is
higher than 4%. In between be influenced by whether you think rental values
will hold up over the next decade.
Since 2006 house prices have been falling and according to Futures trading
in house price indexes, it has fallen by 22% in 2009.
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