Rent vs. Buy

HAPPY TAX DAY!  To all you homeowners – congratulations on the mortgage interest write off.  To all you renters – take a read…


The Misleading Math Behind the Rent vs. Buy Calculation

By Jonathan Smoke |


There’s about $13.1 trillion stashed away in the United States, in plain sight. Where? In our homes!

Do we have your attention yet?

That’s the total value of the equity held by over 75 million U.S. homeowners, according to the latest estimates from the Federal Reserve Board. And that works out to almost $175,000 per owning household.

This is unmistakable evidence that homeownership is a critical building block of household wealth. Owning a home is a key reason why the median net worth of a homeowner is almost $200,000 while the median net worth of a renting household is just over $5,000.

Sure, part of that is because owners were able to pony up a chunk of money to put down on a house, and to qualify for a mortgage. But the act of paying for a mortgage actually helps produce more wealth, by freezing payment amounts and building equity through forced savings.

A 30-year amortized, fixed-rate mortgage is a beautiful thing. It provides an affordable path to buying a home while locking in today’s cost of that home for the life of the loan.

The traditional rent versus buy argument compares the total monthly costs of buying a home with a mortgage with the corresponding rent. So that comparison is relevant when it comes to representing the housing choice trade-off in clear cost terms.

Two years ago, that head-to-head heavily favored buying, thanks to very low mortgage rates and lower prices. Back then, more than three-quarters of the counties in the country saw lower buying costs than renting costs.

With prices and rates higher now, less than half of the counties in the country see math that favors buying.

But those raw numbers hide the fact that unlike a rent check, a percentage of every monthly mortgage payment—after the lender is paid interest—goes toward the owner’s home equity. That means it’s really a forced savings plan.

Over time, less of the mortgage payments go toward interest and more go toward equity, so the savings power is enhanced further.

Here’s how that works out for a median-price home of $250,000 bought in January with 20% down with a monthly payment of $976.

Before their first payment, the proud new homeowners had $50,000 in equity thanks to their down payment. (Actually, 20% down isn’t always typical or necessary, but, hey, it keeps this illustration simple.)

In the first year, an average of 29% of the monthly payments builds equity. After 12 payments, the homeowners have just over $3,400 in added equity.

By year 14, 50% of the monthly $976 payment goes toward equity. Don’t forget that the monthly payment hasn’t changed, because the interest rate was fixed.

At the end of the 14th year, just shy of $64,000 has been added to the initial $50,000 in equity.

In the final year of the 30-year mortgage, while the monthly payment remains $976, 98% of the monthly payments builds equity until that magic day when the home is owned free and clear.

Think you can beat that with rents? Researchers at Harvard put it this way:

“While studies simulating the financial returns to owning and renting find that renting is often more likely to be beneficial, in practice renters rarely accumulate any wealth. In no small part this seems traceable to the difficulties households face in trying to save absent either a clear goal or an automatic savings mechanism.”

So, you want a better rent versus buy illustration? First, find a place to rent for no more than $976—the same as our mortgage payment example above. If you can rent for less, great. Will you be able to save that difference amounting to at least $3,400 in the first year? That would imply you can really pay only about $700 in rent to get the same savings effect.

If you can’t save $3,400 yourself by paying less in rent, ask the landlord if he’ll take a portion of your rent payments and set it aside for your rainy day fund.

Then ask the landlord if he’ll set your rent payment at today’s rate for the next 30 years. And before you close the deal, ask him to raise the rainy day share each year by 1% to 2% until year 30, when he’ll get only 2% of the rent payment.

Clearly, this would not be easy to do.

Even if the house only keeps pace with inflation over 30 years, which is a very conservative assumption, the forced savings inherent in a mortgage guarantees a homeowner is building wealth. A renter household has to be extremely diligent to amass the same savings that the good ol’ 30-year mortgage does automatically.


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Berkshire Hathaway HomeServices – Drysdale Properties

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The Rent vs. Buy – a new site to help you decide …

The Rent vs. Buy dilemma may be one of the hottest questions I am asked as a local Realtor. It is not an easy one to decipher, as we must analyze the wants, needs, budget and goals list. And as rents soar to astronomical heights around here– this questions is getting to be a hot topic. So – when I came across this website SmartAsset – I was pretty stoked to read all the info, play with the widgets and come to some conclusions myself. Enjoy this article and make time to play on the site and see what best suits your needs.  Thanks for reading – Sabrina 

The Rent vs. Buy Decision

For a long time, the common wisdom was that buying a home was a far better financial choice than renting one. Throughout the second half of the 20th century, and into the first years of the new millennium, home prices across much of the country marched steadily upwards, and a house was considered the safest investment around. The logic was simple: if you were spending 30% of your income on housing anyway, might as well spend that hard-earned dough on something that would retain its value for you in the future. Renting, in contrast, was like lighting your money on fire and tossing it in the trash. The rent versus buy decision was a straightforward one.

That all changed in 2007, when the housing bubble that had been silently growing suddenly went pop. A house, it turned out, could lose value—and, as some real-life cases demonstrated, could do so in spectacular fashion. There were stories of totally abandoned neighborhoods outside of Las Vegas, and half-constructed mansions in Florida. Those with the misfortune to buy at the peak of the market in 2006 lost thousands or even millions of dollars overnight. Mortgages went underwater. A foreclosure crisis ensued. Meanwhile, the renters of the world were doing relatively well.

Today, there is no clear answer to the rent v buy question. In some cities, and for some individuals, buying a home may make more sense, while for others, renting a home may be the better choice. What makes sense for Nina in New Orleans and Steve in San Diego may not make sense for Dan in Denver and Christina in Chicago. So how does one decide the answer to this question of, Should I rent or buy?

Where a Rent vs. Buy Calculator Can Help

 Perhaps the most important factor to consider when making this buy or rent decision is how long you plan to stay in your home. If you’ll only be in town a year, renting will almost always be your obvious best choice. If you’re planning on packing up and leaving 12 months down the line, you probably don’t want to spend the time and money necessary to buy a house: think down payment, closing costs, loan charges, appraisal fees and so on. All told, the upfront costs of finding a house and taking out a mortgage can be in the tens of thousands of dollars (or higher!). As a renter, at worst you’ll have to pay a small application fee and make a refundable security deposit of a few months’ rent.

On the other hand, if you plan on staying put for 50 years, renting almost always makes no sense. In the long run, there are significant advantages to homeownership, one of the largest being the mortgage interest deduction, a tax benefit that allows you to deduct mortgage interest payments from your taxable income. For example, if you have a $2,000 monthly mortgage payment, and $1,500 of that goes toward interest, you can deduct that $1,500. So, your taxable income will be $1,500 lower. If we assume you pay a marginal tax rate of 30%, you would pay about $450 less in taxes each month by taking that deduction (30% x $1,500 = $450).

Rental payments, in contrast have no such advantages. Indeed, while a portion of each mortgage payment goes toward increasing your stake in your home by increasing your equity, rental payments go entirely to your landlord, and tend to grow over time. In the long run, the costs of renting can be much higher than buying.

So, if renting is better in the short-run and buying is better in the long run, when does the financial logic switch? When, in other words, do the long-run costs of renting begin to outweigh the upfront costs of buying? It could be three years, or seven or 15. The timing depends largely on where you live. That’s why our rent vs. buy analysis is location-based.

Should I buy or rent? Rent vs. Buy Examples

 As the saying goes: all real estate is local. That has never been truer than it is today. Some housing markets are booming and others are stagnant, and while in some cities rents have taken off, in others they remain as low as ever.

Take Atlanta, for example. Home prices there rose by about 4.4% over the past three years, while rents on two-bedroom apartments jumped 3.4% over the same time period. At those rates, it would likely make more sense for a person looking for a typical two bedroom home to buy if she planned on staying just two years.

In a city like San Francisco, where a typical house can sell for upwards of $500,000, the math can look a little different but the results are the same. Rents in San Francisco have jumped a whopping 8% in the past year, and home prices rose even more rapidly than that, by over 10% according to the Case-Schiller Index. If those rates hold, a San Franciscan staying in town for more than two years should buy now—if she can afford it.

New York City is a different story. Home prices in New York’s notoriously difficult housing market rose just 1.45% over the past three years, while rents over that period rose by around 5%. Even if you were able to find a two-bedroom for $350,000, it would only make financial sense to purchase it if you planned on staying put for a full 18 years.

The Big Apple is a big outlier when it comes to your rent or buy decision, however. Most cities in the U.S. are like Minneapolis, where home prices have risen 7% over the past three years, and rent for the average two bedroom apartment has gone from $960 to just over $1000, a 4.3% increase. In Minneapolis, a person looking for a typical house should buy if he plans on staying at least two years and has the money available for the upfront costs. The lesson here? When asking Should I rent or buy a house? be sure to take your location into account.

Reasons You Might Want to Rent or Buy a House

 Of course, while analyses like the above assume you are making your decision for purely economic reasons, there are other, non-financial factors that you may want to think about as well when wondering Should I buy or rent a house? Many renters, for example, enjoy the flexibility of being able to change pads at the end of their lease. For a homeowner, if you want to move, there’s quite a few hoops to jump through: find a real estate agent, get the house listed, meet with prospective buyers, accept bids, make a deal and, eventually, pay a bunch of fees to close the sale. Getting all of that done can take months, and can be very expensive.

On the other hand, buying a home gives you year-to-year continuity. Rents can change drastically over the course of just a few years, and there’s the ever-looming threat of eviction if a rent increase proves too much for you to afford. Most of the time as a homeowner, you won’t face any spikes in your payment (adjustable-rate mortgages are one exception), and you won’t have to worry about being tossed out on the street if your payment becomes too expensive.

Then there’s the question of maintenance: fixing leaky pipes, painting, cleaning gutters—these are all costs of owning a home, but many homeowners enjoy putting time and energy into their homes. By the same token, many renters complain of unresponsive landlords who refuse to deal with things like bad plumbing or a faulty fridge. These matters of personal preference are the intangibles that even the best rent or buy calculator (see above) can’t account for. Answering the question of Should I rent or buy a home? may require some soul-searching.

In the end, the rent vs. buy decision comes down to your preferences and plans. If you know exactly how long you want to stay in your home and where you want to live, and you have some money saved up, the decision could be as easy as calculating which option will cost you less. If your future is less clear, however, you may have more to consider.

How Long You Have to Live in America’s Biggest Cities for Buying to Make Sense

 Housing markets in major cities are often far more competitive than those in small towns or rural areas. That affects the rent vs. buy decision, as potential homebuyers in metros frequently face significantly higher prices, fees and closing costs. Those high upfront costs can mean that it only makes sense to buy for homeowners who are willing to stay put for a longer timeframe.

With that in mind, SmartAsset took a closer look at the data on renting and buying in the largest U.S. markets. We determined the breakeven point, the time it would take for a homeowner to recuperate those upfront costs of buying a home. (For more on our methodology, check here.)

Developments like the boom in tech jobs and increased migration to sunny West Coast cities have shifted housing economics towards renting in some parts of the country, while in other areas, like the South and Texas, buying is still usually the better bet.

 New York City

New York: 18.3 years (to recuperate costs of buying)

The Big Apple’s housing market is notoriously competitive, and indeed, SmartAsset’s research shows it is the worst urban market for homebuyers in the country. Good deals are nearly impossible to come by and when an attractive option appears on the market, it is often snapped up in days if not hours. That competition bids up prices, which means homes are comparatively more expensive than rentals. The typical New Yorker would need to stay in her home more than 18 years to justify buying instead of renting.

The Tech Hubs

San Jose: 16.73 years

Seattle: 14.9 years

San Francisco: 14.6 years

The boom in high technology over the past few years has generally been concentrated in a relatively small number of cities. It has been especially pronounced in the Bay Area and in Seattle. The growth in high-paying tech jobs in these cities has had profound consequences on their homebuying markets.

In these three cities buying a home only makes financial sense for those who can stay put for at least 14 years (on average). Take note, however, of rising rents. If rents in these cities continue to increase over the next few years, buying may become a more sensible medium-term option for those who have the cash to cover closing costs and a down-payment.

The Sunny West Coast

Orange County: 10.8 Years

Los Angeles: 8.8 years

San Diego: 8.6 years

Honolulu: 8.6 years

In these four western cities, the weather is great, populations are growing quickly, and renting usually beats buying. Average home prices in these cities aren’t quite as high as in the tech hubs or New York, but they are still outside the range most residents would consider affordable. On average, homebuyers in these cities recuperate the costs of buying (instead of renting) after 8 to 11 years.


Portland: 6.9 years

As usual, this Oregon city defies categorization. It hasn’t experienced the boom in tech jobs of its neighbors to the north (Seattle) and south (San Francisco), and the weather in Portland isn’t the draw that is in other Western cities. Yet, the average home in Multnomah County costs over $315,000 (50% more than the U.S. average) and population growth has been steady. Those factors place Portland in a middle ground between buying and renting: for the average Portlander, buying makes sense if she plans on staying put for seven years or more.

 Old Money

Washington, D.C.: 6.5 years

Boston: 6.3 years

D.C. and Boston have historically been among the most expensive housing markets in the country. In these cities, high up-front costs tilt the economic logic away from homebuying for residents who may plan to move around in the near future (recent graduates, for example). But residents who are settling down for the long-term (like more than 6.5 years) could be better off buying.

 The Wild West

Riverside: 5.8 years

Phoenix: 5.7 years

Denver: 5.4 years

These three western cities are experiencing strong population growth, which has put some upward pressure on home prices. In these cities, residents who are comfortable staying in one place for the medium- or long-term should at least consider buying. On average, they will recuperate the high up-front costs of purchasing (instead of renting) in five to six years.

 The Midwest

Pittsburgh: 4.3 years

Chicago: 4.2 years

Minneapolis: 4.2 years

Especially compared to the west and the northeast, buying and renting in the Midwest are both relatively affordable—but because homeownership also increases a person’s net worth over time, buying often makes more sense in the medium- and long-term. The average homebuyer in one of these Midwestern cities should recuperate the upfront costs of closing on a home in just over four years. 

Texas and the South

Houston: 4.2 years

Tampa: 4.1 years

Charlotte: 4.1 years

Atlanta: 4.1 years

Miami: 4 years

Austin: 3.7 years

St. Louis: 3.6 years

Dallas: 3.2 years

Traditionally the most affordable parts of the country (for homebuyers), Texas and the south lived up to their reputation in our analysis. In every major southern or Texan city we examined, the average resident would recuperate the up-front costs of homebuying within just four and a half years of closing. After that, the savings would begin to accumulate.

 Philadelphia and Detroit

Philadelphia: 2.9 years

Detroit: 2.6 years

These two cities buck all the trends. Both have seen their populations fall in absolute terms in the past 50 years (Philly’s by 25% and Detroit’s by 50%). The result is a housing supply far larger than demand, and, in turn, bargain basement prices. On average, a resident of either of these cities should only stay in a rental if she might be moving in the next 3 years.


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Got Questions? – The Caton Team is here to help.  

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Thanks for reading – Sabrina

The Caton Team – Susan & Sabrina – A Family of Realtors

Berkshire Hathaway HomeServices – Drysdale Properties

Sabrina BRE# 01413526 / Susan BRE #01238225 / Team BRE# 70000218/ Office BRE #01499008


Good News for Landlords: Rents Still Rising – Bad News for Tenants

Good News for Landlords: Rents Still Rising  –  Bad News for Tenants

The article below is both good and bad news.  For investors, whom have scooped up deals on the San Francisco Peninsula through the bust, they are raking in the gold with high rents.  For the rentals properties I service, it’s been amazing to see the increase in rent year over year.  But demand is there – and with few homes to buy – the rental market is booming.

For those who are renting, they cringe when they see a letter from their landlord in the mailbox.  Several clients of mine have emailed me this year concerned that their rent went up.  Some as little as $50 – other a more substantial jump.  These renters are the first time buyers of the future.  Skipping dinners out to stash away cash for down payments and closing costs.  And around here – where the median home price starts at $800,000 – we’re not talking pennies and dimes that need to be saved.

Right now the cheapest rental listed on the Multiple Listing Service is a 3 bedroom 1 bath home of about 1050 square feet in the Buri-Buri area of South San Francisco – asking rent is $3,000.  The most expensive rental is a dated but spacious 3 bedroom 4 bath home of close to 4000 square feet in Portal Valley asking for $9,500 a month.  The median rental listed today is a 3 bedroom 2 bath condo in Menlo Park listed at $4,250 a month.

Suddenly that $50 rent increase doesn’t sting as much.

But the word is out – the Bay Area is a wonderful place to live and we’re all paying for it now.  Enjoy this article below…


Good News for Landlords: Rents Still Rising


Average rental prices have ticked up nearly 4 percent nationwide, according to the latest TransUnion Rental Screen Solutions industry report of data collected from property managers in September 2012 and September 2013.

Rents were on the rise for all four of the classifications of rental properties that TransUnion analyzes: newer institutional properties; older institutional properties; older properties in less desirable areas; and older properties in less desirable areas that are in need of renovations/updating. The average rent of all four types of properties was $1,072 in 2013.

The largest rental increases were seen in properties that were in less desirable areas that need renovations, up 4.2 percent to an average of $693.

“The rental market continues to be strong as demand for rental units remains high while consumer credit risk slowly improves,” says Michael Doherty, senior vice president of TransUnion’s rental screening solutions group. “The combination of improving rental risk scores and continued demand for rental properties is particularly good news for property managers. … When the credit risk of the population improves, property managers may be more inclined to tighten their criteria to ensure they are getting the best possible resident. This is integral because a resident who ‘skips’ out on a lease can cost a property manager thousands of dollars in lost revenues.”



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Got Questions? – The Caton Team is here to help.  

Email Sabrina & Susan at:

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Or Yelp me:

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Thanks for reading – Sabrina

The Caton Team – Susan & Sabrina – A Family of Realtors

Sabrina BRE# 01413526 / Susan BRE #01238225 / Team BRE#70000218/ 01499008


Home Prices Rebound According to CNN Money – enjoy this shared article…

Home prices rebound

By Chris Isidore CNNMoney

NEW YORK (CNNMoney) — In another sign of a turnaround in the long-battered real estate market, average home prices rebounded in July to the same level as they were nine years ago.

According to the closely watched S&P/Case-Shiller national home price index, which covers more than 80% of the housing market in the United States, the typical home price in July rose 1.6% compared to the previous month.

It marked the third straight month that prices in all 20 major markets followed by the index improved, and it would have been the fourth straight month of improvement across the full spectrum if not for a slight decline in Detroit in April.

The index was up 1.2% compared to a year earlier, an improvement from the year-over-year change reported for June. While home prices have been showing a sequential change in recent months, it wasn’t until June that prices were higher than a year earlier.

The July reading matched levels last seen in summer 2003, when the market was marching toward its peak in 2006. The collapse of the market after that led to the financial crisis of 2008.

“The news on home prices in this report confirm recent good news about housing,” said David Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. “Single-family housing starts are well ahead of last year’s pace, existing home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing.”

Record low mortgage rates and a tighter supply of homes available for sale have helped to lift home prices. Lower unemployment also has helped with home prices, although job growth in recent months has been slower than hoped.

Earlier this month, the Federal Reserve announced it would buy $40 billion in mortgage bonds a month for the foreseeable future. This third round of asset purchases by the central bank, popularly known as QE3, is its effort to jump start the economy through even lower home loan rates.

Related: Best home deals in Best Places

Mike Larson, real estate analyst with Weiss Research, said part of the improvement in the housing market is due to investors using the low mortgage rates to buy up homes that are in foreclosure and renting them in a strong rental market.

But he said that he doesn’t think there’s much chance of housing prices forming any kind of new bubble in the foreseeable future.

“Clearly the worst is behind us for this market., but this is not a market that is going to take off again,” he said. “While you have a firming up, you still have tight lending standards and people who have been burned are reluctant or unable to get back in the market.” He predicts it will take several more years before housing prices can gain more than 1% to 2% a year.

Related: Buy or rent? 10 major cities

But that is good news for a housing market that was plagued by plunging home values and high foreclosure rates for much of the last six years. And the good news has the potential to build on itself, said Joseph LaVorgna, chief U.S. economist for Deutsche Bank.

“Housing remains a rare bright spot in an economy that is otherwise muddling through,” he wrote in a note to clients Tuesday. “The price trend for housing is significant, because it provides economic stimulus via stronger household balance sheets.”

Correction: An earlier version of this article incorrectly reported that home prices had reached a 9-year high. In fact, they rebounded to the level last seen in summer 2003, before their peak several years later.

Curious about the local real estate market on the San Francisco Peninsula?  Email me! 

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Offer Subject to Inspection – What Does That Mean?

As a Realtor I have a whole dictionary for just real estate jargon.  One of the most confusing terms, and often buyers will get the wrong idea about their agent, is “offer subject to inspection.”  So allow me a moment to explain what on earth this means.

“Offer subject to inspection” is a typical hurdle for buyers to overcome when shopping for homes that are tenant occupied.  The term means – the buyer can physically go in and SEE the home AFTER an offer is accepted.  Sounds a little backwards right?

And no – your agent is NOT trying to strong arm you and force you to buy a home without evening seeing it!

Generally this clause is for homes which are tenant occupied.  In order to preserve the rights of the tenant to have the quite enjoyment of their home – the tenant has the right to refuse prospective buyers to come in and see the home.  That is – until an offer is accepted by the seller, then the buyers has the right to inspect the home.

How does this work you ask?  The buyer must write a REAL offer since the terms are binding once accepted.  When the seller accepts the offer, the buyer will have a certain amount of days which is written into the contract to actually go in and see the home for the first time.  If the home is to their liking and the buyer wants to proceed with the contract – they do.  If the home is NOT to the buyers liking – for just about any reason – during the agreed upon days – the buyer will have the right to cancel the deal and walk away without any harm to both buyer and seller.

So you found a home you like – how do you write an offer?  If there are inspections available before hand – it makes our job of writing the offer a bit easier since we have a good idea of what the condition is.  If there are no inspections, and we haven’t seen the home, we drive by and gather as much info as we can with our eyes from the safety of the car.  We write the offer as best we can with the information provided and once the buyer has seen the home and had inspections we proceed with the new information – either by moving forward or discussing the new information with all parties and find a common and suitable outcome for all parties.

As strange as it seems – it happens more than you know.  For some buyers, they cannot imagine writing an offer for a home without ever seeing the home.  For investment buyers, this very typical and generally have no issues writing up a fair offer to get in.  Of course, what happens after a buyer gets to see the home is a far different story.  I have experienced both follow throughs on the contract and recessions – so truly we cross that bridge together when we get to it.

Which is truly at the root of what us Realtors do.  We are the buyers and sellers guides through Real Estate – what can The Caton Team do for you?

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