Buying a house deemed more expensive than renting

[drscott]

The Economist (my favorite source for global news) has a good writeup on the worldwide inflation in house prices. In particular, they point out that renting in the Bay Area is now vastly cheaper than buying for most reasonable assumptions of future appreciation:

The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least.

My view on this is that it is basically unwise for anyone to overextend themselves in this market just to get into ownership. That being said, the Bay Area has actually not risen in value as much as most parts of the US -- especially in the South Bay, where unstable employment situations have been holding down appreciation. I'm pretty sure houses here will keep most of their value if the bubble deflates elsewhere, and that there is room for further appreciation here if the tech employment situation starts a stronger recovery. Barring some serious reform in local control of building, there will never be enough supply to meet demand. But if I owned a multi-million-dollar house and wanted to maximize my investment, I'd seriously consider getting out of the market and renting.

Comments

[sfmini.livejournal.com]

The Economist is the only magazine I subscribe to. I love it. In my calculations I was much better off renting here than buying, even considering the writeoffs and the lower tax bracket it would put me into. On a purely cash flow basis for a comparable property I'm better off cash flow wise to the tune of about $15,000 a year even with the changes in withholding. Plus I don't have to deal with the bay area hassles of home/condo ownership. Something goes wrong I just call the landlord.

It also helps me that I never sold my Atlanta house. On paper I still consider that my "permanent residence" and since I don't rent it out I can write all that off and enjoy the appreciation on it.

[dr-scott.livejournal.com]

Then you have kind of beaten the system, since your Atlanta house has appreciated more on a percentage basis and you didn't have as hefty a cost to carry! You're smart for a dog. But someday you'll probably either want to move back or sell...

[sfmini.livejournal.com]

The house has tripled in value since I purchased it in 98. When I moved here in 03 I didn't know if the move was permanent so I left it in the hands of a friend. I do know now that I have no desire to return to Atlanta so I will most likely sell soon, but am waiting to see if my friend is going to get a job transfer his company is rumbling about. If he gets the transfer I have to sell on the open market, if he stays he will buy the house from me. I hate to sell it, I redid everything just the way I wanted it, but I just don't want to go back to Atlanta.

[dr-scott.livejournal.com]

Long-distance landlording is pretty bad, so when your friend leaves (if he does) selling would be indicated. Not to mention locking in a large profit in an inflated market. Park the money in intermediate-term munis or something like that and wait for better opportunities.