WEST PALM BEACH, Fla. – Sept. 9, 2010 – West Palm Beach resident and Realtor Laura Pearlman is selling her historic, Spanish-style home, and – gasp – considering renting.
It may go against every instinct for a Realtor to tout the benefits of renting over buying, but from about 2005 until just recently, it’s made more financial sense in many markets to rent as housing prices skyrocketed.
Now, following the epic housing crash and with interest rates at record lows, economists and financial planners say it might be time to rip up that annual rental lease for a more long-term, at least eight-year, commitment to buy.
But the decision often has as much to do with personal circumstance as real estate’s financial ups and downs, and individuals have many issues to weigh when considering the benefits of buying over renting.
Of course, it’s also all predicated on whether a potential buyer can even get financing from banks still struggling with bad boom-time loans.
In Pearlman’s case, the rigors of keeping up an 84-year-old home have become a burden, and she and her husband eventually want to move west to Wellington where they hope to find a larger piece of land.
An unsure market, however, is also a driving force in making the couple renters again.
Pearlman said the argument against renting is always “you’re throwing money away” while earning no equity, but she figures there’s no harm in renting for a year to see where the market settles out.
“My husband wants to rent because he just doesn’t want to take a chance right now,” Pearlman said. “Look, you can get a nice house for $1,250 a month, no homeowners association payment, no property taxes, no lawn care, no responsibility.”
Doing the math
Andres Carbacho-Burgos, a Moody’s economist, said there’s little doubt that renting in South Florida was a better bet during the peak years of 2005 and 2006.
“What has happened since then is the housing prices have come down by a lot more than the costs to rent an apartment,” he said.
To illustrate that, Carbacho-Burgos looks to a price-rent ratio that considers the buy-versus-rent question in a more mathematical way. The ratio is calculated by taking the median cost to buy a home and dividing it by the annual cost to rent.
A price-rent ratio less than 20 is generally considered a sign that it is better to buy.
For example, if the annual rent on a three-bedroom, one bathroom home is $15,000, and a similar home is selling for $200,000, the rent ratio is 13, favoring buying as the better option.
According to Moody’s, the average price-rent ratio using apartment rents in 2006 in Palm Beach County peaked at 31 but was down to 18 in the first quarter of this year.
But that number isn’t perfect. Theoretically, the calculation should use home rental rates, which aren’t easily available in a uniform format for specific areas.
Also, the 18 ratio is based on using median home prices from the National Association of Realtors, which can be fickle and quick to change depending on the volatility of the market.
Carbacho-Burgos said if the S&P/Case-Shiller home price index is used, Palm Beach County’s price-rent ratio today is about 15. The S&P/Case-Shiller index calculates prices monthly using a three-month moving average. It also uses data on properties that have sold at least twice in order to capture the true appreciated value of each home.
“I can’t answer the question in absolute terms, but the ratio is much closer to the norm now than at the peak of the housing market bubble,” Carbacho-Burgos said.
A more complex evaluation of whether it’s better to rent or buy in today’s market can be completed using one of many online calculators. Most of these calculators consider mortgage rates, down payments, tax breaks and closing costs when figuring the ratio. Some go as far as calculating annual maintenance on a home, monthly rental insurance and your personal rate of savings.
At Lendingtree.com, the calculation favors buying a $200,000 home as opposed to renting at $1,100 a month under the following circumstances: the buyer puts 20 percent down on a 30-year loan with a fixed 4 percent interest rate, and plans to stay in the home for at least five years.
Thinking long term
While the total cost to own the home in the first year far exceeds the rental payments, after five years the net cost to own is about $51,000 compared with paying $66,900 to rent.
“You should look at a house as something you want to live in, not a get rich quick thing,” said Barry Rabinowitz, a certified financial planner and principal of BER Financial Group, LLC in Plantation.
Rabinowitz recommends buying a home now if a person plans to stay in it for five to eight years.
“The days of houses going up in value 25 to 30 percent is not realistic, but neither is the other extreme of them going down that much either,” he said.
In July, Palm Beach County’s median sale price for a single-family home was $226,000, an 8 percent decrease from July last year, but down 42 percent compared with the price in 2006 of $390,100.
Rabinowitz’s recommendation is also based on itemizing deductions on a tax return, which allows a homeowner to claim mortgage interest and property taxes.
The mortgage-interest tax deduction doesn’t eliminate the cost of borrowing money, but it does reduce it.
“When you rent a house, nothing is deductible,” Rabinowitz said.
How much can be deducted depends on the mortgage interest paid each year. It is also important to consider what your standard deduction is for the year depending on age, marital status and income bracket. For example, the standard deduction for married couples in the 25 percent tax bracket and filing a joint return is $11,400 for 2010. If your mortgage interest was $11,520, for example, you get a slightly higher deduction, but you have to pay $11,520 in interest to receive it. The standard deduction for single filers for 2010 is $5,700.
House vs. condo
Answers to the rent vs. buy question also vary dramatically depending on whether it is a condominium or single-family home.
Peter Zalewski, a principal with Miami research and brokerage firm Condo Vultures, said you can buy an average condominium today in Palm Beach County for about as much as it would cost to rent it.
Single-family homes in neighborhoods on the upswing, however, are going to be more expensive in the first several years.
“If a buyer is looking at a five- to eight-year hold and understands different neighborhoods, buy today,” Zalewski said. “The likelihood is that single-family homes will recover quicker than a condo.”
And contrary to what conventional wisdom might say, Zalewski and Pearlman agreed that owners are not so desperate that they are offering rock-bottom rates on rental properties.
Renters should expect rates to go up between 3 percent and 5 percent each year, something that doesn’t happen with a fixed interest rate mortgage.
“If a tenant squeezes a landlord when the market is down, when it recovers, that landlord is going to squeeze back,” Zalewski said.
Copyright © 2010 The Palm Beach Post
It may go against every instinct for a Realtor to tout the benefits of renting over buying, but from about 2005 until just recently, it’s made more financial sense in many markets to rent as housing prices skyrocketed.
Now, following the epic housing crash and with interest rates at record lows, economists and financial planners say it might be time to rip up that annual rental lease for a more long-term, at least eight-year, commitment to buy.
But the decision often has as much to do with personal circumstance as real estate’s financial ups and downs, and individuals have many issues to weigh when considering the benefits of buying over renting.
Of course, it’s also all predicated on whether a potential buyer can even get financing from banks still struggling with bad boom-time loans.
In Pearlman’s case, the rigors of keeping up an 84-year-old home have become a burden, and she and her husband eventually want to move west to Wellington where they hope to find a larger piece of land.
An unsure market, however, is also a driving force in making the couple renters again.
Pearlman said the argument against renting is always “you’re throwing money away” while earning no equity, but she figures there’s no harm in renting for a year to see where the market settles out.
“My husband wants to rent because he just doesn’t want to take a chance right now,” Pearlman said. “Look, you can get a nice house for $1,250 a month, no homeowners association payment, no property taxes, no lawn care, no responsibility.”
Doing the math
Andres Carbacho-Burgos, a Moody’s economist, said there’s little doubt that renting in South Florida was a better bet during the peak years of 2005 and 2006.
“What has happened since then is the housing prices have come down by a lot more than the costs to rent an apartment,” he said.
To illustrate that, Carbacho-Burgos looks to a price-rent ratio that considers the buy-versus-rent question in a more mathematical way. The ratio is calculated by taking the median cost to buy a home and dividing it by the annual cost to rent.
A price-rent ratio less than 20 is generally considered a sign that it is better to buy.
For example, if the annual rent on a three-bedroom, one bathroom home is $15,000, and a similar home is selling for $200,000, the rent ratio is 13, favoring buying as the better option.
According to Moody’s, the average price-rent ratio using apartment rents in 2006 in Palm Beach County peaked at 31 but was down to 18 in the first quarter of this year.
But that number isn’t perfect. Theoretically, the calculation should use home rental rates, which aren’t easily available in a uniform format for specific areas.
Also, the 18 ratio is based on using median home prices from the National Association of Realtors, which can be fickle and quick to change depending on the volatility of the market.
Carbacho-Burgos said if the S&P/Case-Shiller home price index is used, Palm Beach County’s price-rent ratio today is about 15. The S&P/Case-Shiller index calculates prices monthly using a three-month moving average. It also uses data on properties that have sold at least twice in order to capture the true appreciated value of each home.
“I can’t answer the question in absolute terms, but the ratio is much closer to the norm now than at the peak of the housing market bubble,” Carbacho-Burgos said.
A more complex evaluation of whether it’s better to rent or buy in today’s market can be completed using one of many online calculators. Most of these calculators consider mortgage rates, down payments, tax breaks and closing costs when figuring the ratio. Some go as far as calculating annual maintenance on a home, monthly rental insurance and your personal rate of savings.
At Lendingtree.com, the calculation favors buying a $200,000 home as opposed to renting at $1,100 a month under the following circumstances: the buyer puts 20 percent down on a 30-year loan with a fixed 4 percent interest rate, and plans to stay in the home for at least five years.
Thinking long term
While the total cost to own the home in the first year far exceeds the rental payments, after five years the net cost to own is about $51,000 compared with paying $66,900 to rent.
“You should look at a house as something you want to live in, not a get rich quick thing,” said Barry Rabinowitz, a certified financial planner and principal of BER Financial Group, LLC in Plantation.
Rabinowitz recommends buying a home now if a person plans to stay in it for five to eight years.
“The days of houses going up in value 25 to 30 percent is not realistic, but neither is the other extreme of them going down that much either,” he said.
In July, Palm Beach County’s median sale price for a single-family home was $226,000, an 8 percent decrease from July last year, but down 42 percent compared with the price in 2006 of $390,100.
Rabinowitz’s recommendation is also based on itemizing deductions on a tax return, which allows a homeowner to claim mortgage interest and property taxes.
The mortgage-interest tax deduction doesn’t eliminate the cost of borrowing money, but it does reduce it.
“When you rent a house, nothing is deductible,” Rabinowitz said.
How much can be deducted depends on the mortgage interest paid each year. It is also important to consider what your standard deduction is for the year depending on age, marital status and income bracket. For example, the standard deduction for married couples in the 25 percent tax bracket and filing a joint return is $11,400 for 2010. If your mortgage interest was $11,520, for example, you get a slightly higher deduction, but you have to pay $11,520 in interest to receive it. The standard deduction for single filers for 2010 is $5,700.
House vs. condo
Answers to the rent vs. buy question also vary dramatically depending on whether it is a condominium or single-family home.
Peter Zalewski, a principal with Miami research and brokerage firm Condo Vultures, said you can buy an average condominium today in Palm Beach County for about as much as it would cost to rent it.
Single-family homes in neighborhoods on the upswing, however, are going to be more expensive in the first several years.
“If a buyer is looking at a five- to eight-year hold and understands different neighborhoods, buy today,” Zalewski said. “The likelihood is that single-family homes will recover quicker than a condo.”
And contrary to what conventional wisdom might say, Zalewski and Pearlman agreed that owners are not so desperate that they are offering rock-bottom rates on rental properties.
Renters should expect rates to go up between 3 percent and 5 percent each year, something that doesn’t happen with a fixed interest rate mortgage.
“If a tenant squeezes a landlord when the market is down, when it recovers, that landlord is going to squeeze back,” Zalewski said.
Copyright © 2010 The Palm Beach Post
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