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Rent or Buy?


I've been hearing contradictory complaints from people in our bi-weekly Real Estate Live online chats. In roughly equal numbers, people ask why rents aren't going down given the surplus of unsold homes, while others complain that sale prices are too high compared with rents. So which is it?

I did a little spot check on the market, searching for houses advertised for rent on WashingtonPost.com and then looking up asking prices for similar houses listed for sale. From this little experiment, it looks like rent isn't much of a bargain, at least in the close-in suburbs.

In the Belle View section of Fairfax County, just south of Alexandria, I found a nice four-bedroom, two-bath rental house with an updated kitchen for $2,495 a month. Searching houses listed for sale on the multiple listing service, I found a similar place, also with four bedrooms and two baths, just half a mile away with an asking price of $459,000.

Assuming a 4.75 percent interest rate on a 30-year fixed-rate mortgage, that monthly principal and interest payment would be $1,916 with a 20 percent down payment; $2,155 with 10 percent down, or $2,275 with 5 percent down. Of course the latter two would require the added expense of mortgage insurance, and all three examples would involve extra costs for property taxes and homeowners insurance. But I'm not factoring in the tax deductions for interest and property taxes, either. Overall, it looks like buying such a home is pretty comparable to the cost of renting.

I did a similar search in Bethesda, and found a four-bedroom, three-bath rental on a corner lot in the Walt Whitman High School district. It carries a steep rent, $3,950 per month. A comparable for-sale house, also on a corner lot in that school district, carried an asking price of $580,000. With a 5 percent down payment, the monthly mortgage would be $2,875. More money down would, of course, lower the monthly payment. In this case, you would be paying quite the premium to rent.

It's an extremely small glimpse of the market. Both are quite desirable neighborhoods that have not been ravaged by foreclosures. But it seems clear to me now that renting is not always cheaper than buying in this market. How do the rent/buy comparisons look in your neighborhood?

By Elizabeth Razzi  |  March 26, 2009; 6:00 AM ET
Categories:  The market  
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Comments

First of all, do the real math or none at all. There's a rent versus buy calculator right here on the WaPo that's pretty darn good. The one at the NYTimes is even better.

You HAVE to factor in transaction costs, you HAVE to factor in maintanence, loss of income on the downpayment, HOA fees, property taxes. Buying as soon as PI = rent, or worse when interest=rent, is just plain stupid in a declining market.

The two things you mentioned are not mutually exclusive. In fact, make perfect sense together. If house prices are too high for people to be able to off-load them, owners often rent them out, which hcan drive down rental prices. Once prices reach rental parity this spiral will stop as people start buying again because it makes sense to do so.

That said, some THs and condos in Kingstowne are now available at or near rental parity. It depends on your assumptions for future losses (if the prices go down to cash-flow positive for an investor, which may be the case for apartments) and for future rent increases.
I do believe prices for the bottom rung in some areas are at or near their eventual bottom, because there are places where owning finally does beat renting again.

Posted by: kingstowne_renter | March 26, 2009 8:53 AM | Report abuse

The economy is far too volital to make buying a logical choice.

This includes the rent being higher as better to loose for lease term than 30 years.

Watch overseas partners finances, and know deficit prior to a credit ruining commitment.

Posted by: PAPointon2 | March 26, 2009 2:31 PM | Report abuse

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