Posted by John Scott Smith on Thu, Mar 04, 2010 @ 11:23 AM
Yesterday, I clicked on a Tweet from a friend who is a Florida Realtor, Debbie Kirkland. Debbie had a link to the Ginnae Mae calculator which compares the price of buying a home versus renting. It is absolutely worth taking a look at, here. VERY cool! However, you really gotta watch out for the bias that this calculator, and others like it, have in favor of buying. What do I mean by that? Let's take a quick look.
What's there?
Well, appreciation is there. Two percent (2%) of it, to be precise. The default setting for the "Yearly Home Value Increase Rate" is two percent. Now, you can change that number, but you can't make it "accurate". How can it not be accurate? Well, according to Zillow in the last twelve months, home prices have actually dropped by five percent (5%). When I tried to enter that number into the calculator, it unequivocally said, "The Value You Entered Must Be A Positive Number." So, there's that..
What's missing?
The calculator does not take into account any transactional costs. When you go to sell your home down the road, most home-owners will enlist the help of a real estate agent. (As with all professionals, always interview several before you decide on which one to choose.) There will be a commission for your real estate agent's services. In my experience, that can range anywhere from four to seven percent (4-7%) of the sales price of the home, and according to Mortgage News Daily, that will be in the neighborhood of six percent (6%). On a one hundred and fifty thousand dollar ($150,000) house, which is the default on the calculator, that's nine thousand dollars ($9,000). That's a fairly large chunk of change to leave out of the calculation, and the significance will be even more apparent in my next point.
The thing:
Yes, there's a thing. So when you look at the calculator, it is set to default to a one hundred and fifty thousand dollar house ($150,000), with two percent (2%) annual appreciation, for ten (10) years, and yadda, yadda, yadda... if you hit "calculate" it says that you will come out thirty-four thousand and sixty-three dollars ($34,063) ahead for buying versus renting. That's kinda huge! A total no-brainer, you really should buy.
If, however, we change the annual appreciation to "zero" (the lowest number that it will accept) and then subtract out the nine thousand dollar ($9,000) real estate agent commission when they sell the house for you in ten years, you come up with saving five thousand and sixteen dollars ($5,016) by renting, another no-brainer. Of course, you should rent.
I won't argue here whether you should or should not buy a home. (In the interest of full disclosure, I'll share that I've been a homeowner since 1997, and in that time I've owned and lived in four different houses.) But, don't let a calculator like this influence your decision when it's this biased.
Reasons for renting should include flexibility to move when you'd like, absence of maintenance as the landlord takes care of things, and the ability to quickly change your quality of living should something unexpected happen that is either good (like a promotion) or bad (like a reduction in hours).
Reasons for buying should include the privacy that no one who is not a guest can enter your home. There is the stability that no one can tell you that your lease is up, and it's time to move. There is usually a backyard for barbeques with family and friends. There is the freedom to decorate and paint any way you'd like without worry that it's going to come out of the security deposit.
There are any number of reasons to look at for renting and for buying. Most of these are intangible. They don't have a price tag, and they can't be added to that calculator.
Whether to buy a home is a big decision, and one that should make with a full weighing of all of the costs and the benefits. But, putting too much weight on how well you'll "do", financially? Well that requires that you have a crystal ball that's in good working order. Or at least one that's more accurate than Ginnie Mae's calculator...
So, what do you think? What are the most important reasons for you when it comes to buying or renting? Comment, below, and let us know!
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