In my last post I talked about the cost of buying versus renting over the long term (25 years). Even with a fairly large difference between monthly rent versus monthly mortgage, a return of 4% annually on the savings is not enough to cover the costs of renting. On the other hand, buying can cost money too, unless the price of the home rises over double what we bought it for. Now we’re going to look at the short term and how that affects our decision to buy or keep renting for a bit longer. Let’s look at a 3 year term.
We’ll use our last example of the $500,000 mortgage at 6.5%, 25 year amortization. Over the first 3 years we’ll have paid out $3375 x 12 x 3 = $121,500 (and we had to shell out $500/month in maintenance/strata fees and property taxes, adding another $18,000 in costs and making our real outlay $139,500). But most of that was interest payments and we still owe $473,538 to the bank. So we’ve only accrued $26,462 in equity.
If we’d rented instead, and saved the difference, we’d have paid out $2400 x 12 x 3 = $86,400 and saved $35,100. If we’d put that in a compound interest account paying 4% annually we’d have $37,351.
If we are now, 3 years later, deciding to buy…the renter is in a WAY better position. The homeowner has shelled out much more money than the renter ($139,500 versus $86,400) but has less equity to use as a downpayment on a house than the renter ($26,462 versus $37,351). In order for the homeowner to fare better than the renter, the value of the home must go up by enough to cover the extra they put in ($53,100) plus the difference in savings/equity (about $11,000) and all the costs related to buying and selling (realtor commisions, closing costs, property transfer taxes, legal fees, home inspection, etc). So at least $62,000. That’s an increase in value of over 10% in just 3 years.
Another consideration is that if housing prices drop, the homeowner will take a loss on the sale of the house and their $26k could be less. However, the renter would not have lost money, having used a conservative, non-real estate related investment.
Seems the only way that buying now can be better than renting is if one assumes that the price of a home bought today will go up by at least 10%. That’s been true for the last 3-5 years, but not likely at any other time in our real estate history (going back about 30 years). And the signs are pointing to a slowdown in growth at best here, and a drop much more likely. So it would seem that the best thing for DH and I to do is continue renting and put aside the difference in what we’d pay for a mortgage.
But for how long? When does it become “time to buy”? The way I see it, it’s when the downpayment allows us to buy a place that we really want without borrowing more than we can afford, and with room to weather any reasonable increases in interest rates. Or, when rents go up (or prices down) such that the difference we’re putting aside becomes too small to matter much. When will that be? I don’t know. Heck, it could be next week, lol.