Yet another rent vs. buy thread

You can't use a variable arm because you don't know what the future rate will be. Today's rents are determined by long-term interest rates over the depreciated life of the asset: 27.5 years for real estate (not land) vs. 30 years for mortgages.

Unquestionably if you use a short-term rate you will be far likelier to come up with the answer you want, but that doesn't compensate for the additional risk.

Use a standard 80/20 30-year mortgage & you have a deal, & I'll even let you shave a point or two off the current jumbo premium given today's unusually tight credit market.

I figured you would say that. Again, I'm not trying to come up with the answer I want. I'm trying to come up with a fair range for a given property. A potential buyer for an owner occupied apartment that plans to stay in for less than 7 years would do a rent vs. buy analysis with a 7/1 rate. I'm not saying your 30 yr fixed rate is incorrect, I'm just saying it is the higher end of the range. Cool?

Take an average of both, but the real jumbo rates from, say, bankloan.com, or, better, chase.com.

Your analysis, though, leads to a quadrupling of transaction costs since you're positing that the owner will move once every 7 year for 30 years. I had ignored them in the past because if you only move once and amortize the amount over 30 years it's not a lot per year, but that may not be the case when you quadruple them.

Also, I believe the 7-year rates are currently lower than the 1-, 3-, and 10-year rates.

And please don't say interest only, b/c the answer is no.

Sorry - I don't mean to get into the middle of this long-standing dispute - but I was wondering what was wrong/right with the New York Times buy vs. rent calculator?

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html#

For full disclosure I don't have any strong feelings one way or the other - but right now I rent and I'm leaning toward buying next year.

It doesn't let you account for uneven fluctuations in prices. If prices fall by 10% then rise by 5% the next year, the effect is quite different than if they fall by 5% then rise by 10% the following year.

If you start with $100, the first scenario leaves you with $94.50, the second one leaves you with $104.50.

Looking at conforming rates from bankrate... There is not much difference between 30yr fixed (5.77%), 15yr fixed (5.35%) and 5/1 arm (5.39%). Then add premium for jumbo... of which steve is willing to give back 1%. Can we run analysis with 6% rate to keep it simple?

Also, I don't think that using a 7/1 implies increased transaction costs as one can refinance. That said, you are taking on interest rate risk by going this route.

Thanks Stevejhx.

He said they're going to move every 7 years. If you like you can take the 7-year fixed portion for 7 years, and then average the minimum and maximum resets every year. It complicates the model a lot, however.

6% is a very low historical interest rate, I might add.

Don't be sorry october, you ask a good question. The NYTimes calculator is one way to look at it. If (and that is a big IF) we get this model right, we will have a very good indicator of equilibrium on a monthly basis, which is a narrower way to look at the same calculation. Additionally, this calculation ignores appreciation and rent increases, which I like, since those items are even more subjective than the ones we are discussing.

True... even tilting it this way toward renting, I still think that you still get to 2x.

There is value in doing something simple. You can complicate it later with sensitivities.

How many times do you think someone that rents will move in 30 years? Additionally, we are doing a point in time analysis. If I move in 7 years, the game has changed, rates have changed, rents have changed, I would have to do this anlaysis all over again for a new property. We are taling about a one time analysis for a spot period of time. I think it is fair to use a 7/1 rate. We did agree to a range didn't we?

Ok. Pick a range. 5.5% - 6.5%?

(I think this encompasses 7/1 to 30yr fixed... given the adjustment that steve is giving.)

I'm good with that are you steve?

I have no idea how many times someone that rents will move in 30 years. I don't think anyone does. But renting doesn't have high transaction costs.

Pick 6.5% if we're talking jumbo, but you just can't limit the analysis to just 7 years since the benefits of buying accrue mostly upfront, whereas the benefits of renting accrue more toward the end.

So if you do 7 years you have to do 7 years over and over again, else it's not an accurate comparison.

"I would have to do this anlaysis all over again for a new property."

That's exactly the point. We're talking about the butterfly effect here, Juice. You can't say "I'm getting all these benefits in the short-term, so as soon as I stop getting these benefits, I'll stop the analysis."

But you can't, because unless you die, you need to keep on living somewhere.

I may be out of my league here - but to keep the comparison straight - wouldn't you assume that a person renting moves as many times as a person who buys (in this case every 7 years)? The economics might be slightly different in that a renter would generally have more flexibility - but presumably the reasons for moving (need for more space due to growing family, increased income, change of jobs, life changes, etc.) would be the same for a renter as compared to a buyer. (Feel free to ignore my input if it doesn't hold up.)

I think it's far better first to assume that nobody moves in 30 years. Why would anyone want to aim to make a complicated model first, then simplify it? Normally you do it the other way around.

Just intuitively, if you do move around a lot it benefits the renter, since renting has low transaction costs and home prices and rents move at approximately the same rate.

Somewhere in this model I assume you are inserting the capital gains exemptions for a single or couple as well as mortgage deductibility since both of these are enormously significant to the end financial picture. In addition, most maintenance deductibility seems to average around 50% which might a a decent place to pin that for a model.

Any model that ignores the tax code is essentially meaningless since no one operates (legally) outside of the IRS rules.

kylewest, were you as intelligent as you think you are you would know that the capital gains exemptions and mortgage interest deductions are already baked into market rents by definition. If owner-occupied residential real estate is a capitalized expense - which it is by definition: prepaid rent - and therefore imputed rent = market rent - which it is by definition - all factors involved in both transactions are included.

And they always give you the same answer: owners' full carrying costs - which includes tax debits and credits, transaction costs, maintenance costs, insurance costs, repair costs - should be equal to market rent, since the value of what you gain from renting is identical to what you gain from buying: shelter.

Right now, as demonstrated in multiple threads, it costs twice as much to own as to rent.

patience kylewest, there are numerous inputs we need to agree on, we are only on the first one. steve, rather than go back and forth I think 6.5% is a reasonable rate. Let's go with that.

Ok, how about return on invested capital that would otherwise be equity? I think you were saying 11% which is the average S&P return. I suggested something closer to a risk free rate (I think 5%) based on an inability to guarantee the average S&P return.

JuiceMan, you already know the answer to that. Were real estate a risk-free investment, then you would compare the opportunity cost of owning it to that of owning another a risk-free investment. In the long-term the S&P 500 is extremely consistent at an 8% real rate of return, since the end of WWII on a moving average basis. In the short-term it is more volatile than real estate only because real estate is less liquid. Real estate has other invisible risk factors built in, like the inability to sell a property when you want to, thus forcing you to maintain payments, or because of the illiquidity of the market, an inability to "time" it, at least in the simplest form of buying on the dip and selling on a spike. And you further cannot "dollar-cost average" real estate, which greatly reduces the actual risk of volatility. Not so much a factor for a down payment, but indeed a factor if you invest real-estate and common charges into the market over time, rather than paying real-estate taxes and common charges.

If you insist on that ridiculous comparison the thread is over - compare risky investments to risky investments, risk-free investments to risk-free investments.

Working with real rates is better - take any nominal rate and subtract 3% inflation from it.

"based on an inability to guarantee the average S&P return."

should read:

"based on an inability to guarantee an increase in home prices."

Case closed.

Your boxing yourself up steve and comparing the risk of real estate to the S&P (which you have already said you cannot do). The risk of real estate has nothing to do with the ability to get a tax deduction from your loan.

based on an inability to guarantee the average S&P return."

should read:

"based on an inability to guarantee an increase in home prices."

Case closed.

Case closed? If you want steve, we don't have to figure any increase in home prices to this formula. So let’s instead focus on what we are talking about here. Returns from a tax deduction vs. returns from the S&P. I'm a lot more comfortable that I will receive my tax deduction at the end of the year than making 11% on the S&P. Would it be better if we make an assumption that the person taking the loan is job stable and can afford the loan? I don't think that is much of leap.

No, JuiceMan, you cannot ignore the opportunity cost of not buying real estate, which is what you seek to do, because over time the effect is huge. It is one key factor in the imputed rent = market rent equation, and you can't change a basic economic equation just to suit your case.

What you want to do is EXCLUDE perhaps the largest benefit of renting over time, yet INCLUDE perhaps the largest benefit of purchasing over time, and then stop the analysis after 7 years because the largest benefit of purchasing over time - the mortgage interest deduction - accrues in the early years and depletes over time, whereas the largest benefit of renting - the opportunity cost of not investing elsewhere - accretes over time, and therefore is negligible in the earliest years.

To further your theory you want to use short-term interest rates to finance a long-term asset, when under normal circumstances a) short-term interests are lower than long-term interest rates, but much more volatile; b) long-term assets are financed with long-term financing to mitigate the interest-rate risk; c) no prudent businessman would do such a thing. You then want to ignore the potential reset of that short-term interest rate over time by claiming that the owners will simply move ever seven years, blithely disregarding the fact that when they do move, they still need someplace to live, so they will still be subject to the prevailing interest rates at the time.

No, JuiceMan, any economist or financier will tell you that your model is HOPELESSLY flawed, skewed in such a manner as to obtain the answer you want. Or as Adalai Stevenson was wont of saying, "Let me show you the opinions that I base my facts on."

What you want to do in terms of analysis wouldn't get you an AA in Home Economics from Hostos College, never mind pass muster with anybody who knows what he's talking about. What you need to do is finance long-term assets with long-term interest rates, use real historic data smoothed as much as possible using rolling averages over long periods of time, and calculate all potential credits and debits involved in the transaction. Not cherry-pick data that will give you a particular result, regardless of the risk involved.

The analysis you're proposing is EXACTLY why we are where we are in the real-estate market today: everybody ignored the risks.

Read any article about what goes into imputed rent, what the prudent way is of financing a long-term asset, how economists calculate opportunity cost, how risk is measured, and get back to me on how you want to do this based on what you learn. Otherwise, the thread is over, because I'm wasting my time.

ok steve, I tried. You are backwards in your logic (as usual), the next thing we were going to tackle was how we treat principal, but we would never have agreed on that anyway.

I was seriously trying to come up with an unbiased model for people to use, but hence, your need to be right outweighs your need to do something logical and helpful. You really are a piece of work steve and your logic and numbers are tragically flawed. I am satisfied that you bailed on this exercise early hwoever, because that tells me that my way of viewing things is exactly what you would like to prevent from coming out on this board.

So steve, enough with questions about people producing numbers to refute your theories, because it is impossible to refute illogical and irrational numbers. I will enjoy your future 12x and sky is falling malarkey, knowing well that those numbers are coming from an inflexible "economist" that is incapable of seeing the full picture.

I thought as much, JuiceMan.

If you can tell me why what I'm saying about your analysis is wrong, then please let me know. Just one question, actually:

Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

Steve's unwillingness to continue reasoned discourse and retreat into obstinence and recitation of pat phrases he favors (writing for the 1000th time on streeteasy forums that "it costs twice as much to own as to rent") is what I'd expect from someone who admits to cheating to get into graduate school and since he didn't get caught finds no fault with this dishonesty. Steve, you have never "demonstrated on multiple threads" your assertion that it costs 2x more to buy than rent--simply repeating it over and over until you exhaust those who explain otherwise is not demonstrating anything. Here, JuiceMan was taking things a step at a time and you just went off at him. This could have been a valuable thread. Thanks for ruining yet another discussion.

Then, kylewest, answer the question:

Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

And didn't I prove it, kylewest (if these listings are still available)

a listing at 99 Jane - always an expensive building is down some $100k:

http://www.streeteasy.com/nyc/sale/167077-condo-99-jane-street-west-village-manhattan

$1627 psf.

They're trying to rent either the same place or someplace identical to it for $7,500 per month, down $1,000 in the last week:

http://www.streeteasy.com/nyc/rental/289191-condo-99-jane-street-west-village-manhattan

I say do the math: buying the place with a conventional 30-year fixed jumbo mortgage (if you can get one) will cost you $12,290 per month. Renting it will cost you $7,500 per month. It would therefore cost you 63% more out-of-pocket for the joy of owning the place that you can rent and save almost $60,000 a year.

However, if you lower the price by 63%, you get a psf value of about $1,100, which was typical for this building in 2004.

Spunkster and others, THAT IS RIDICULOUS. Historically those two costs are exactly the same. If you use 40x income as the rental threshold, you'd have to make $300k to rent the place. To take out the $1,596,000 mortgage using the historical 2x income rule you would need an income of $798,000 to buy it.

REALLY?

Somebody show me the math that makes it worth it, because I say it doesn't exist. No amount of inflation is going to inflate incomes that much that fast. And this is the typical ratio for renting / purchasing in NYC today. It is unsustainable, especially as banks cut down on lending and Wall Street retrenches to recoup its losses.

Unless somebody else can do the math for me. Like Spunkster, who thinks his properties are going to soar in value because they have in the past.

Don't change the thread. JuiceMan was talking to you about what the average return assumption should be in the model for stock investments. You the destroyed the conversation by starting to bark "Case closed, case closed," and now change the discussion to a completely different question that you have discussed endlessly for months. EVERYONE here knows how you feel on this. How about something new for just a day? Huh? How about it. Try to talk civilly to JuiceMan and see where it goes. And post short threads so people actually may read them.

Then, kylewest, answer the question:

Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

You crack me up, kylewest. You say, "Steve, you have never "demonstrated on multiple threads" your assertion that it costs 2x more to buy than rent--simply repeating it over and over until you exhaust those who explain otherwise is not demonstrating anything."

I show you one - where just the mortgage and maintenance and (abated) taxes are 63% higher, without adding insurance, special assessments, the full cost of property tax - and you say, "Don't change the thread."

So I answer your question and then I'm changing the thread? Typical.

kylewest, answer the question:

Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

Actually, I take that back: I wrote that example a long time ago and forgot what I wrote, and it includes ONLY the mortgage payment, not maintenance or real estate taxes.

2x more expensive to buy than to rent. Period.

You and JM have questions to answer.

I am sorry to see that you guys could not come up with a useful model. I think it would have been very useful.

I'm truly sorry for even opening this thread and Juiceman I blame you. Why would you think you could have a rational conversation with this guy on this subject.

All that said I don't care other than to ask Steve, was that jane st example above suppossed to prove that its 2x more expensive to own then to rent?

october, they can't because they can't answer the question:

why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

"was that jane st example above suppossed to prove that its 2x more expensive to own then to rent?"

Does it not? OH WAIT! THE TAX DEDUCTION EFFECT!

You're a moron.

Assume the moron comment was not aimed at me. Oh well.

ccdevi, you are correct and I deserve the blame. Have you ever seen a Mentos dropped into a two liter bottle of Coke? Logic = Mentos Steve = Coke

http://www.youtube.com/watch?v=hKoB0MHVBvM

no october, not at you.

JuiceMan, I might agree to proceed with the analysis if you answer the question:

Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

stevejhx, as someone who welcomed your voice and opinions back when you started posting, I have to say you're negatively impacting the usefulness of these boards recently. JuiceMan approached you in a civil manner and tried pretty damn hard to come to a compromise, but you really want none of it and repeat your mantras tirelessly and have resorted to quite a bit of insulting. You tell us not to read your posts if we don't like them, but you're posting on nearly every thread. I didn't want to post this here, but enough's enough.

At this point, you would really have to convince me to proceed with the analysis steve. I don't have the time to deal with this type of behavior, I could knock out this model with a rational person in less than five minutes.

bjw2103, I post my own threads. I came in peace. I agreed to JuiceMan's interest rate, but in my opinion there is a fundamental flaw in the way he's doing his analysis: he wants to count all the benefits of owning but none of the costs, and count all of the costs of renting but not the benefits, and he wants to cut off the analysis precisely at the time the benefits of renting accrue and the benefits of buying deplete.

Apart from that, everything he wants to do is fine.

So to move this forward, since I disagree with JuiceMan's methodology, I am merely asking him a question: "Why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?"

I think it is wrong to ignore that because it violates the very definition of imputed rent, but if JuiceMan can give me a good reason to do so - other than it helps him get the result he's looking for - then I'll look at it and research it, and if he's right, I'll acquiesce.

I'm sorry, I can't resist ... I refrained from posting on here for a while because what is the purpose of having a rational conversation with people who are always right.

But, this post, from someone who has called me a charlatan, a fraud, said I don't understand accounting, don't understand corporate finance, make incredible statements relating to the effects of technology and transportation from the past 100 years, etc. etc.
---
stevejhx
about 21 hours ago
report abuse It doesn't let you account for uneven fluctuations in prices. If prices fall by 10% then rise by 5% the next year, the effect is quite different than if they fall by 5% then rise by 10% the following year.

If you start with $100, the first scenario leaves you with $94.50, the second one leaves you with $104.50.
---

Well of course the arithmetic is correct, but it doesn't prove a point as I'm not sure if the poster intended sleight of hand or simply misunderstands the commutative and associative properties in math.

Two scenarious outlined:
1: Down 10%, then up 5%
2: Down 5%, then up 10%

Yes, they are quite different

By the commutative property, Down 10% then Up 5% is equivalent to Up 5% then down 10% ... in other words, the order of when something goes down 10% and goes up 5% doesn't matter. But going down 10% and up 5% is VERY different than going down 5% and up 10%, or going up 10% and going down 5%.

So anyway, what was wrong with the NY Times calculator? Probably the same thing wrong with my corporate finance lesson two weeks ago ... it simply didn't fit the closed mind or aggressive and deceptive argument style by Steve.

ps - the Commutative and Associated Properties are ALWAYS correct. Case Closed. You don't know what you are talking about. You are a moron. PLEEZE. Period.

Oh verain, you're out of your mind:

Down 10% then Up 5% is equivalent to Up 5% then down 10%

Of course it is, but it's not what I said. I said:

Down 10% then up 5%
Down 5% then up 10%.

You're an idiot, just like your "corporate finance lesson."

Answer the question: why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

"does it"

"buying the place with a conventional 30-year fixed jumbo mortgage (if you can get one) will cost you $12,290 per month. Renting it will cost you $7,500 per month. It would therefore cost you 63% more out-of-pocket for the joy of owning the place that you can rent and save almost $60,000 a year."

putting aside that you are not taking acct of tax deductions and you seem to be including principal repayment as pure "out of pocket" cost, by your own words, this isn't 2x.

can you say a bunch of words now that sound smart when read quickly but actually make no sense at all? I very much enjoy that. I once called you a 1 trick pony but that's actually your 2nd trick, along with the whole strawman argument thing you use with such great success.

ccdevi, that's just the mortgage principal, not taxes or maintenance. Add them in and you get 2x.

Yup.

And regarding the "tax deductions" - which are factored into market rents by definition anyway - I'm more than willing to look at their effect, as soon as JuiceMan answers the question, which he's had all day to answer:

why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

The simplest way to solve the debate.

Survey 100 or 1000 people who have rented for the past 10 years. Survey the same amount of people who have owned for the past 10 years. All should start with the same income at the beginning. Then examine which group has a higher worth at the end.

You can plug in all the numbers that you want, but you will never be able to factor in benefits from owning and negatives from renting like - owners having more write offs, stability which allows them to make more carrer risks or finance starts up, or renters not being able to save as much as they claim, etc.

The best judge is to look at the two pools and see who has a higher net worth at the end.

I will bet $10K that over 90% of the time, those who owned have higher net worths than those who rented.

Steve is a Don Quixote fighting a losing battle. He cannot even produce 1 credible Financial Advisor who supports his position.

Steve's comment will be that the last 10 years are an outlyer. Then adjust the years to 20, 30, 40 whatever you want Steve and the results will be the same. Renters net worth will be dramatically less.

petrfitz, recognize this first: there is no such thing as a "credible Financial Advisor." Like realtors, they are sales people, and will sell you whatever they think they can.

You most likely have a universal life policy or a whole life policy, laden with fees that never make you any money, with tax-free assets inside of them when the policy itself is tax-free.

And you still haven't learned your lesson: the tax benefits are factored into the price. Perhaps you haven't learned it because you're listening to real estate agents telling you what a great investment real estate is, while they make a 6% commission off of you.

why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

Why aren't fee-based (as opposed to commission-based) financial advisors credible?

Ok so any credible economist, Suze Orman, Jim Cramer, TV personality, anyone with any credibility.

Steve anyone with notarity or credibility who agrees with you.

Also you have no comment on the survey Steve.

The survey wasn't worth commenting on.

Suze Orman said that she would not be buying in this current housing market, because she thinks it's going down another 20%, and won't recover until at least 2010. She said it last Saturday night.

Any "credible economist" might be Robert Shiller, of Case-Shiller fame, who recently said that this housing crisis will be worse than the Great Depression's.

Is that enough?

Please provide proof that either Suze Orman or the others support your claim that "RENTING IS ALWAYS BETTER THAN BUYING"

The "proof" you supplied above in each case only speaks to the time during the credit crisis not ALWAYS.

Also the survey is the only way of proving it and you know that it would easily disprove your "hypothesis"

"Suze Orman said that she would not be buying in this current housing market" - does not in any way say that "renting is ALWAYS better than buying"

"Robert Shiller, of Case-Shiller fame, who recently said that this housing crisis will be worse than the Great Depression's" - says nothing about "renting is ALWAYS better than buying"

We just want someone else to support your claim Steve. Just one credible person. Just one.

Okay, so I proved to you that Suze Orman is on my side in this market, and so is Robert Shiller. Glad you came around.

RENTING IS ALWAYS BETTER THAN BUYING is if you look at residential real estate as an asset, rather than as a capitalized expense (rent), which it is.

Robert Shiller proved with real numbers that since the end of WWII owner-occupied residential real estate increased at 0.7% real per annum. On a moving average basis, the S&P 500 increased a real 8% per annum during the same time frame.

That is for OWNER-OCCUPIED residential real estate. Investment real estate is a different animal, and because it produces income (rather than substituting for an expense) you can make money on it.

now it's your turn: why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

Steve please provide a link where Schiller specifically supports your claim. Your interpretation of his research does not count. If it is so clear cut there should be a statement, paragraph, or something where he states support for your premise.

Send us the link where he says that "Renting is ALWAYS better than owning"

how did you prove that Suze Orman or Schiller agree with you?> You havent. You pointed to a statement about a specific period of time "the time of the current crediut crisis" and claimed that it supports your ALWAYS over time. It does not.

Steve it is easy to see through you.

Steve logic with the statements above are the same as "if I am hungry at 2:01 pm, then I must be hungry all the time for my entire life"

Nope - Steve you are a dope.

oh my.

"that's just the mortgage principal"

I think you meant the mortgage payment (principal and interest). You should count principal (except to the extent of the opportunity cost going forward). Also to get your number, you must be using 8.5% interest. Really no need to go on, that's just insane and absolutely ridiculous.

"Add them in and you get 2x"

Well no actually you don't.

"why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?"

Of course you should factor in the "cost" of the downpayment. Why do you call mortgage interest deductions, short term? Or are you really talking about mortgage interest (which I have to admit I didn't even think was deductible but its so small who cares anyway?).

"And regarding the "tax deductions" - which are factored into market rents by definition anyway"

What the heck does that mean? Answer...nothing. Its nonsense. The topic was coming up with a formula to compare rent with purchase cost, there is absolutely no reason to ignore any factor that affects purchase cost.

oops, thats "should not" count principal...

also, petrfitz is right you didn't prove Orman is with you, in fact you proved the opposite, she says 20%, no recovery until 2010. you have said 50% and I've seen you say its a permanent impairment.

ccdevi - Steve takes "imputed rent" twists the logic and claims that the principle essentially zeros out the effect of tax exemptions and deductions. He thinks that his principle means that the actual cash that an owner gets back doesnt mean anything to them because of his twisted logic.

I got a tax refund of $36K that I would not have if I rented. But according to Steve's logic, I didnt really get that cash back.

oop again, what wrong with me...."Or are you really talking about mortgage TAX (which I have to admit I didn't even think was deductible but its so small who cares anyway?)"

As vocal and eccentric as steve can be, I don't believe he ever stated "RENTING IS ALWAYS BETTER THAN BUYING"

http://www.streeteasy.com/nyc/talk/discussion/3500-renting-is-always-financially-more-beneficial-over-time-than-owning

TheFed he says is over and over again.

First, I'm not stevenj. That was spunky, now banned.

Second, I'm done discussing this. Bye.

Steve is done and hasnt supplied us with 1 credible person who supports his claims.

His logic is flawed, comes apart at the littlest variable, and only applies to the aggregate of of all RE. He doesnt take into effect locality, location, etc etc etc etc.

Steve is renting his way to wealth! Genius!

yeah I'd figured you'd be done. its about this point when people cut through the blather, dissect your words and call you on them that you go away. is it for good? alas i suspect not.

petrfitz, "the actual cash that an owner gets back doesnt mean anything to them because of his twisted logic."

What "cash back"? It's not "cash back." It's cash you never had to pay in the first place.

From that article written by the Federal Reserve and others about imputed rents, which you obviously didn't bother to peruse:

How Not to Judge the Sustainability of Housing Prices

To assess whether house prices are unsustainably high, casual observers often begin by looking at house price growth. Figure 1 shows that between 1980 and 2004, real house prices at the national level grew 39 percent, or 1.4 percent annually.

I WILL SPEAK NOW IN CAPS SO YOU CAN SEE WHAT I'M WRITING VERSUS WHAT THE ARTICLE SAYS:

SO NOW WE'VE SEEN HOW MUCH HOUSING PRICES INCREASE IN REAL TERMS, IN A 20-YEAR PERIOD. THE RATE IS HALF THAT SINCE WWII.

A Formula

The formula for the annual cost of homeownership, also known in the housing literature as the “imputed rent,” is the sum of six components representing both costs and offsetting benefits.

The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing times the risk-free interest rate.

NOW WE SEE WHY JUICEMAN IS WRONG TO USE THE RISK-FREE RATE FOR JUST THE DOWN PAYMENT. IT IS THE RISK-FREE RATE FOR THE "PRICE OF HOUSING."

The second component is the one-year cost of property taxes, calculated as house price times the property tax rate t

The third component is actually an offsetting benefit to owning, namely the tax deductibility of mortgage interest and property taxes for filers who itemize on their federal income taxes. This can be estimated as the effective tax rate on income times the estimated mortgage and property tax
payments.

AGAIN WE SEE WHAT IS WRONG WITH JUICEMAN'S MODEL - IT IS THE "EFFECTIVE" TAX RATE, NOT THE "MARGINAL TAX RATE" THAT IS USED.

The fourth term reflects maintenance costs expressed as a fraction of home value.

AKA COMMON CHARGES AND SPECIAL ASSESSMENTS FOR US, AS WELL AS AMORTIZED TRANSACTION COSTS.

Finally, the fifth term, is the expected capital gain (or loss) during the year

WHICH, AS WE HAVE SEEN, IS 1.4% IN THIS MODEL, VERSUS 0.7% OVER A LONGER TERM, AND I THINK FALLING HERE.

And the sixth term represents an additional risk premium to compensate homeowners for the higher risk of owning versus renting.

WHICH JUICEMAN DENIES EXISTS - OWNING IS IN FACT HIGHER RISK THAN RENTING.

The sum of these six components gives the total annual cost of homeownership:

Equilibrium in the housing market implies that the expected annual cost of owning a house should not exceed the annual cost of renting. If annual ownership costs rise without a commensurate increase in rents, house prices must fall to convince potential homebuyers to buy instead of renting. The converse happens if annual ownership costs fall. This naturally correcting process implies a “no arbitrage”
condition that states that the one-year rent must equal the sum of the annual costs of owning.

"NATURALLY CORRECTING!"

NOW HERE IS WHAT WE CAN DISCUSS IF YOU WOULD LIKE:

Under these assumptions, the predicted user cost is 5.0 percent: that is, for every dollar of price, the owner pays 5 cents per year in cost. Leaving aside other differences between renting and owning, people should be willing to pay up to 20 times (1/0.05) the market rent to purchase a house.11 Hence, for example, a two-bedroom apartment that rents for $1,000/month ($12,000/year) should sell for up to $240,000. This price-to-rent ratio provides a baseline against which housing prices can be judged “too high” or “too low.” If price multiplied by the user cost exceeds the market rent, housing is relatively costly.

BUT THAT UNDER THESE ASSUMPTIONS:

i) the risk-free 10-year interest rate is 4.5 percent;
ii) the mortgage rate is 5.5 percent;
ii) the annual depreciation rate is 2.5 percent
iv) the marginal tax rate of the typical homebuyer is 25 percent;
v) the property tax rate is 1.5 percent;
vi) the risk premium is 2.0 percent
vii) the long-run appreciation rate of housing prices is 3.8 percent (expected inflation of 2.0 percent plus a real expected appreciation rate of housing of 1.8 percent, the average from 1980–2004 for the metro areas in our sample for this paper)

Now this is me talking again. I agree with that - every word of it, except the 20x annual rent ratio necessarily, which is true in general - and was in 2004, the year this article was written - but not in the very expensive Manhattan market today for many reasons.

Here's the kicker, and why I hold my position:

House Prices are More Sensitive to Changes in Real Interest Rates in High Appreciation Rate Cities
We have thus far downplayed one of the most critical and least understood determinants of the user cost of housing—the expected growth rate of housing prices. Expected price appreciation is central to the debate over whether a housing bubble exists and, if so, where. Evidence suggests that expected rates of house price appreciation may differ across markets. Because expected appreciation is subtracted from the user cost, metropolitan areas where expected house price appreciation is high have lower user costs than areas where expected house price appreciation is low. Any given change in real interest rates, then, operates on a lower user cost base in high price growth cities, yielding a larger percentage effect. For example, if in the above example we had assumed that the expected real rate of appreciation on housing
was 2.8 percent rather than 1.8 percent, the predicted user cost would have been 4 percent instead of 5, and the potential price-to-rent ratio would have been 25 instead of 20. If we had assumed an even higher rate of expected price growth, say 3.8 percent, the predicted user cost would have been 3 percent and the implied price-to-rent ratio would have been 33.3.

This is me again. I think:

1) Interest rates are higher than 5% for jumbo mortgages, and far more difficult to get (not quantified in this model).

2) More importantly, property prices are going to fall, therefore lower the price to rent ratio from the current astronomically high level.

Here's why. Go to that paper:

www2.gsb.columbia.edu/faculty/cmayer/Papers/Assessing_High_House_Prices.pdf

Look at the chart on page 17, for the Imputed-to-Actual-Rent Ratio versus Price-to-Rent Ratio for New York.

It hovers around 1, as it should. "Naturally correcting." Look where it was in 1988, just before the last property bust. This chart ends at 2004, which I maintain is in equilibrium, and it is at about 1. Prices doubled since then, rents did not. As they always do, on the way down they will overcorrect.

Go to Table 3, User Cost-Based Assessments of House Price Levels, then Markets where the imputed rent-rent ratio peaked in the late 1980s and had a trough in the 1990s.

Look at NY's figures.

Go to the conclusion on page 19/20:

"Of course, in Boston, New York, Los Angeles, San Diego and San Francisco in the late 1980s and Denver, Miami and Houston in the mid-1980s, a high imputed-to-actual-rent ratio was a prelude to sizable housing downturns. Hence, our methodology successfully identifies prior periods of excessive valuations in the housing market."

So, JuiceMan, this argument is now over. I wanted to make it somewhat simpler than what the paper presents, but since you refused to answer me, I've provided you with the proper answer.

Do your model according to what you get from the paper. The link is there. Imputed rent right now, at these levels, are far higher than market levels, tax benefits, risk-free rates (used properly - on the cost of the property, and including the greater risk of owning which you deny exists) do NOT outweigh the extra financial burden of owning. Property prices are no longer rising at astronomical rates, and I know very people who expect them to do anything but fall. Interest rates on jumbo mortgages are far higher than the 5% used in the sample: 50% more, in fact. We do have higher effective tax rates, but that's a double-edge sword: it makes the monthly carrying costs effectively cheaper, but capital gains are taxed as regular income tax in NY, making AMT more likely. Amortized transactions are also very high, as are labor costs.

And then there's AMT.

So do your math this way, tell me what you get from it and what assumptions you're using.

K?

We will fall to 12, and then climb back up. UNLESS rents correct from where they are as well - which seems to be happening - in which case we might reach 18ish, since Manhattan is a relatively expensive market.

I've made a few concessions to you, JMan. Your turn.

Remember, that formula is for the ANNUAL PRICE of owning. To be accurate for the purposes of what I have been saying, you need to do this every year over 30 years, the depreciation period. Calculate that rents increase at the exact same rate as home prices, because they do.

steve, didn't I already agree with you that prices were out of "equilibrium"? Wasn't this whole exercise (before you spit the dummy) designed to determine a reasonable range for how far out of equilibrium we were for a given property? You are becoming delirious and I fear for your stability.

"The first component is the cost of foregone interest that the homeowner could have earned by investing in something other than a house. This one-year cost is calculated as the price of housing times the risk-free interest rate.

NOW WE SEE WHY JUICEMAN IS WRONG TO USE THE RISK-FREE RATE FOR JUST THE DOWN PAYMENT. IT IS THE RISK-FREE RATE FOR THE "PRICE OF HOUSING."

steve, I love this one. If I could highlight on this screen, I would highlight risk free rate. How is it that I'm wrong again? So you know it is me, I will type in caps. PRICE OF HOUSING = (EQUITY * RISK FREE RATE) + ONE YEAR OF INTEREST PAYMENTS

K?

Thank you for your concern, I'm quite fine, thanks.

No, JuiceMan, the price of housing is not just the equity, but the full price of the housing: what it cost to buy. Or else, there would be no way to come up with their conclusion that:

"Leaving aside other differences between renting and owning, people should be willing to pay up to 20 times (1/0.05) the market rent to purchase a house. Hence, for example, a two-bedroom apartment that rents for $1,000/month ($12,000/year) should sell for up to $240,000."

You need to account for mortgage interest, capital gains and other taxes, which are not paid on the EQUITY, but on the full price of the housing, just like it says in the article.

If you buy a house for $100,000, that's the amount that you're investing, just that you're borrowing part of it. So if the risk-free rate is 4.5%, your cost is $4,500 ($100,000 * 4.5%), not $900 ($20,000 * 4.5%). Where do you see "equity" or "down payment" in this?

i) the risk-free 10-year interest rate is 4.5 percent;
ii) the mortgage rate is 5.5 percent;
ii) the annual depreciation rate is 2.5 percent
iv) the marginal tax rate of the typical homebuyer is 25 percent;
v) the property tax rate is 1.5 percent;
vi) the risk premium is 2.0 percent
vii) the long-run appreciation rate of housing prices is 3.8 percent (expected inflation of 2.0 percent plus a real expected appreciation rate of housing of 1.8 percent, the average from 1980–2004 for the metro areas in our sample for this paper)

THE PRICE OF HOUSING IS THE PRICE OF HOUSING, NOT THE INVESTMENT IN IT. Otherwise, you wouldn't need the mortgage rate.

Admit you're wrong.

Then, my calculation of "opportunity cost" was done in an entirely different (and equally acceptable) way.

Then, there's this part missing from your "model": an additional risk premium to compensate homeowners for the higher risk of owning versus renting.

That you deny exists.

And: effective tax rate, not the marginal rate that you wanted to use.

Not everyone agrees with this model (Robert Shiller, for one) but I'll abide by it for the purposes of our discussion. If you'd like to calculate the disequilibrium using it, I'd be glad to abide by the result.

I love Steve's logic.
>>I said:
Down 10% then up 5%
Down 5% then up 10%.
<<

Might as well have said: Renting is better than buying, or the NY Times rent calculator is wrong, or whatever other argument you enjoy making, by stating 3+4 is not the same as 7+8.

Verain, if ass were not naturally followed by hole, then you wouldn't be who you are today.

3+4 is not the same as 7+8.

Is it?

I say it's not.

Down 10% then up 5%
Down 5% then up 10%.

R not the same thing. Makes a huge difference in figuring out whether it's better to buy or to rent, since expectations of property price increases is part of the formula, and in that, Down 10% then up 5%
Down 5% then up 10% makes a HUGE difference.

Like JuiceMan's calculation of what property prices are. LOL.

Assh*le.

ooh, good come back.

Why use poor logic in your original argument to support a position? Because if you shout enough and type the same nonsense over and over, often in capital letters, maybe people will think you are right simply because you are there.

And frankly, yes, to be an asshole, most of the average guys on here have no idea ... you seem like you know what you are talking about.

But you don't.

And JM is full of shit, which is why he doesn't answer:

PRICE OF HOUSING = (EQUITY * RISK FREE RATE) + ONE YEAR OF INTEREST PAYMENTS

If you plug that into the formula in the article (from the FED) you get a circular equation. It is impossible to come up with a purchase price of $240,000, as the article does, if you only use the equity w/o knowing what percentage the "equity" is of the house price.

It's all BS, just like evillager, verain, and all the rest. Financial mumbo-jumbo. If they want to use the Fed's formula, I'll do that. If they want to use my formula, I'll do that. Otherwise:

"Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?"

They can't answer that, either.

MANHATTAN IS IN FOR A HUGE PRICE CORRECTION, by anybody's formula. Which is why they won't engage me.

LOL.

I'll happily admit that I don't understand the formula. We were talking monthly costs, then yearly, and now we are talking about the risk free rate * the price of the house. I'm not being snarky here steve, but what exactly does that tell us?

Steve, your problem with having an argument with me is that I haven't taken any position about whether Manhattan residential real estate is overpriced or underpriced, or renting in the short term or long term is beneficial or not.

I've merely taken a careful look at the way you construct your argument and have found misstatements, exaggeration, fallacious logic, and in some cases outright lies. Plus arrogance, silly bravado, excessive and unfounded ad hominem style of engagement, and a very strange manner of over-dramaticism.

JuiceMan, I'd love to be on your side, & we're probably closer than we know.

There are multiple ways to calculate the fair value of purchasing vs. renting. I chose one way, the Fed chooses another, but the answer is the same though the ratios differ. I tried to pick something easy - simple economic opportunity cost using the down payment. The Fed went the long route, I don't think it matters, which is the premium over the risk-free rate for the entire purchase price, adjusted by the premium over the risk-free rate for owning (which has a risk) vs. renting (which doesn't).

I had read that article long before I made that post. mschlee brought it to my attention. My (not specifically stated but implied since it's now in the equation) theory is that the risk of investing in the S&P 500 OFFSETS the risk of owning real estate vs. renting it. Here's what I said:

"Were real estate a risk-free investment, then you would compare the opportunity cost of owning it to that of owning another a risk-free investment. In the long-term the S&P 500 is extremely consistent at an 8% real rate of return, since the end of WWII on a moving average basis. In the short-term it is more volatile than real estate only because real estate is less liquid. Real estate has other invisible risk factors built in, like the inability to sell a property when you want to, thus forcing you to maintain payments, or because of the illiquidity of the market, an inability to "time" it, at least in the simplest form of buying on the dip and selling on a spike. And you further cannot "dollar-cost average" real estate, which greatly reduces the actual risk of volatility. Not so much a factor for a down payment, but indeed a factor if you invest real-estate and common charges into the market over time, rather than paying real-estate taxes and common charges."

The Fed says the same thing in a different way: there is a risk in investing in the S&P 500 vs. real estate, there is a risk in investing in property rather than renting it. I say that those risks offset each other; the data bear me out.

Here's what it tells us: why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?

Dude, if you understand CAPM as you say you do, the Fed's formula - being economic, not modern portfolio theory - is WAAAAY easier to understand. Let's agree on the inputs, the offset, and a way to calculate them. You can't aggregate - as you tried to do - all the many (and recognized) benefits of owning yet ignore the opportunity cost of not owning.

Sometimes, buying real estate - as a capitalized expense - IS THE BEST THING YOU CAN DO. Other times, when it costs you twice as much to own as to rent, it makes no sense.

So, agree to the Fed's formula, or mine, or state yours and answer my criticisms as I will gladly answer yours.

Else, become vverain or evillager. HELP!

"Steve, your problem with having an argument with me is that I haven't taken any position about whether Manhattan residential real estate is overpriced or underpriced, or renting in the short term or long term is beneficial or not."

Vverain, I don't care what your position is, and I don't care if I have an argument with you. I respect JuiceMan much more than I do you because, like me, he states an opinion and says if he's wrong. You don't.

I have taken a position, and stated why, and even agreed to multiple ways of calculating it. If you calculate it as a p/e ratio it's 12x. If you calculate it as the Fed does, it's 20x. If you calculate it as 40x monthly rent or 28% of annual income, they're just different ratios using different numbers that give you the exact same answer. I will accept any provable way of doing the calculation, provided that it is grounded in historical data. What I won't accept is the spunky / houser / et al. comment that I'm blowing it out my arse.

B/C I do, in fact, understand the numbers, and I will, in fact, admit if I screw up. And most importantly, like a man, I will state what I think.

same old same old. now we flip back to the strawman.

"Ignoring which rate to use, why should we ignore the long-term opportunity cost of not investing a down payment elsewhere, yet include the short-term benefit of the mortgage tax deduction, when we're dealing with a long-term asset?"

"They can't answer that, either."

I answered that a long time ago. Of course you don't ignore the opportunity cost, what a revelation.

Again I'll ask why you refer to the mortgage deduction as a short term benefit?

ccdeivi: LMA

It's all there.

yes i know. you ask a question (which as far as i can tell is based on a misrep of JM's positions), you hold it out there as this nugget of brilliance, i answer it, twice, and again you have nothing to say.

this is where you either go away or type another 8 paragraphs that seem intelligent but really don't make any sense.

vverain pegged you perfect a few posts back.

have a good night.

"I answered that a long time ago."

What was the answer?

"why you refer to the mortgage deduction as a short term benefit?"

You've never seen an amortization schedule, I presume. You pay most of the interest up front.

With renting, you gain most of the benefit through accretion of your principal, which occurs at the end.

I've offered you a different formula from mine. Use it & let me know the answer.

I said in 2 different posts that of course you should take into account the opportunity cost of investing in real estate. If you're not going to read the posts then whats the point?

Yes Steve I've never seen an amort schedule. Or maybe you haven't. 10 years into a 30 year loan, the interest is still over 80% of what it was day 1. Real short term. Not to mention loans of over 1 mil.

I have no idea what "your" formula is, and with regards to the one from the article you quoted, other than some questions I have with regard to how opportunity cost is calculated, I don't think I have any problem with it. Seems pretty straightforward and obvious to me.

Well ccdevi, Juiceman has a problem with it - he doesn't understand it.

See, even if you use the 20x figure - which isn't the case b/c of interest rates and other factors, including falling rent - you still have apartments priced 30% above current rents.

However, I might buy at 15x.

Why 15x steve? Is 12x an overwhelming buy signal?

btw, I understand many things steve, but some of your posts require A.D.D translation services (do you offer that?). To say I don't understand you is not the same as understanding the content we are discussing, but you know that already. Oh and by the way, you have man tits.

"If you buy a house for $100,000, that's the amount that you're investing, just that you're borrowing part of it. So if the risk-free rate is 4.5%, your cost is $4,500 ($100,000 * 4.5%), not $900 ($20,000 * 4.5%). Where do you see "equity" or "down payment" in this?

i) the risk-free 10-year interest rate is 4.5 percent;
ii) the mortgage rate is 5.5 percent;
ii) the annual depreciation rate is 2.5 percent
iv) the marginal tax rate of the typical homebuyer is 25 percent;
v) the property tax rate is 1.5 percent;
vi) the risk premium is 2.0 percent
vii) the long-run appreciation rate of housing prices is 3.8 percent (expected inflation of 2.0 percent plus a real expected appreciation rate of housing of 1.8 percent, the average from 1980–2004 for the metro areas in our sample for this paper)

THE PRICE OF HOUSING IS THE PRICE OF HOUSING, NOT THE INVESTMENT IN IT. Otherwise, you wouldn't need the mortgage rate."

steve, have you actually done the calculations for your precious imputed rent theory / paper? Do me a favor, run the calculations for a $1.25M property and let me know what you come up with for "Annual Cost of Ownership". Use your numbers that you have quoted here and the formula from the "Assessing High House Prices: Bubbles, Fundamentals and Misperceptions" article you provided.

Differences are not economic

Juiceman, how come you never got an answer to your question? lol

Every now and again, some people will notice an article on some website someplace about a “rent-or-buy” showdown. Usually, it's a crock of manure, as much of the press appears to have been bought off by the financial industry, but from time to time, somebody gets it correct.