Rent versus Own: In Chicago, it’s still cheaper to rent
Crain’s recently focused on the dilemma many people have voiced here at Crib Chatter. Should they rent or should they buy? Renting seems like the much better financial deal right now.
The general statistics also seem to confirm that renting is smarter right now. From Crain’s:
Apartment rents are surging in the Chicago area, but that check to the landlord is still a lot smaller than a monthly mortgage payment.
Rent in the Chicago area represented just 60.0% of the after-tax monthly mortgage payment for the median home in the third quarter, according to a recent report by Deutsche Bank Securities Inc. That is up from 59.6% in the second quarter and a low of 58.2% in second-quarter 2006.
The article has a chart that is very interesting.
Either rents have to really spike, housing prices have to come down, or mortgage rates have to come way, way down again. Or a combination of all three.
Deutsche Bank estimates that the Chicago-area market will get close to an equilibrium level if the median home price falls 10% from its third-quarter level and if mortgage rates fall a full percentage point. The Chicago-area median home price rose 2.5% in the year ended Sept. 30.
One way or another, the housing equilibrium will be reached. Question is: How will it get there?
Now, does this comparison take into account the deductibility of mortgage interest and property taxes? The article doesn’t say, but the chart says it does include mortgage interest and property taxes, which is important for the monthly payment amount, but you wind up getting some of that back every year.
Some do, some don’t. If you only itemize because of interest and prop taxes, then your tax savings can be much less. You would have gotten the standard deduction anyhow.
What I would be worried about are all the incidental costs of ownership that are not included in the calculations, primarily the loss of investment income on the down payment and monthly cashflow difference, but that’s just me.
John
It does say “after tax”, so they are taking the deduction benefit into account. As they are discussing the “median” home, I would hope that they based the tax benefits on a “typical” buyer of a median house–i.e. a person (or family) with gross income about 1/3 the median price.
I’m curious – is this median home a SFH out in the suburbs, or a condo downtown? I notice that ownership costs listed in the graph don’t mention anything about association dues. The linked article doesn’t seem to break this calculation down, either.
Anyway, this looks like it’s a good tool for judging the general trend in the Chicago area. However, a person really needs to be calculating this on their own, for their own particular situation. For my own family, based on where we want to live and what we want to live in, renting has been much cheaper than owning for as long as I can remember – but we have seen a different trend than the graph suggests. For us, the cost differential is getting smaller over time, not larger.
I think that rents will creep up in the Cook County because of the escalating property taxes. Even with the cap at 7%, I think this will start to be passed on to the renter eventually. Chicago just got the new reassessed property tax bills in November 2007.
Really, over 10 years, you guys still think it is better to rent?
It’s not a matter of “think.” Whether it’s better or not is a simple matter of math. People who instinctively say “renting is throwing money down the drain” usually are forgetting that buying real estate entails lost opportunities in other investments. It’s not just that renting is cheaper in the short run. In the long run it’s often (not always) cheaper, too, because your down payment plus sunk-cost interest and tax payments could have been growing at 8-10% per year in the markets.
I did a calculation of rent vs. own with 100% down (so no sunk costs for interest payments on a mortgage) in one of these threads. The costs were essentially even over the long run. But with a down payment? Hard to justify buying in this market if cost alone is your guide. I think the comment with calcs was in an early post on 600 N. Fairbanks, if you are interested in hunting it.
I meant “with a less than 100% down payment,” it’s very hard to justify buying in this market right now–and by that I mean, in a market where prices are, very best case scenario, going to stay flat for a while (and more likely scenario, actually decline).
Rent vs own calculators are somewhat tricky. You have to factor in some assumptions through parameters that can lead to drastically different conclusions. Most importantly, you have to decide what the yearly appreciation (depreciation) on the property will be and what the yearly increase (decrease) in rent will be. These numbers can change things drastically for even small changes. Assuming 2% appreciation on a home each year over 10 years vs 3% appreciation per year changes things drastically.
I would advise people not use them in reaching their final decisions unless they have a very clear market view as to where prices and rents are headed.
It isn’t just the declining prices, it is the fact that renting is currently way less than owning. Therefore, every month rings in more savings for the renter. So, even if you plan to hold very long-term, there is no need to even think of buying until owning is in line with renting. Even for the speculators among homeowners (foolish as they may be), there is no need to buy until appreciation is obviously outpacing the monthly savings from renting. We are a long ways from that happening.
JKD, your comment is again “on the money.” I think some heads would explode here if they ever contemplated the opportunity costs from downpayments and monthly outlays in excess of rents.
Mike,
I don’t think that apartment buildings with 6 or more units are covered by the 7% cap. In fact, the application of the cap to residential properties will result in higher tax bills for all properties not covered by the cap, including apt buildings.
Also, the assessor has been steadily reducing the tax burden on apt buildings of 6 or more units by lowering the assessment rate nearly every year. These properties were historically assessed at 33% of market value and have been reduced every year for the last several years down to the current 22% (for 2007 taxes payable 2008). This has negated some of the increase in taxes that would have come with higher assessments. I think they are to be further reduced for a few more years down to 16%, the same rate as applied to residential property.
Rent increases in most parts of Chicago will be lucky to keep pace with inflation. The downtown market will most likely see drops in rents due to rising inventory of new rental buildings (including some begun as condos) and many, many accidental landlords.
Whether is is better to buy or sell really depends on a lot of things. You need to remember that you are buying a highly leveraged asset. If you have a $500,000 condo that goes up 2% per year, that is $10,000 per year added to your net worth. Thus, even if homes don’t go up a ton, the leverage can make a huge difference. If you are in a high tax bracket, buying makes even more sense. If the market stays flat to down over the next 5 years, you will be better off renting than buying, but even a little appreciation can go a long way (I didn’t take into account maintainance or the cost of selling, BTW).
Either rents have to really spike, housing prices have to come down, or mortgage rates have to come way, way down again. Or a combination of all three.
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If rent mysteriously went way up to match housing monthly prices, there will be a lot more homeless people living on the street. The most common reason to rent is that you cannot afford the PITI.
Rates have come down about 1 point in the past two months for a 30yr fixed loan. They will come down even more on the ARM’s as the fed continues to cut rates. On average monthly payments are now about 10% less making it more affordable.
Condo Investor on January 24th, 2008 at 10:34 am
Rates have come down about 1 point in the past two months for a 30yr fixed loan. They will come down even more on the ARM’s as the fed continues to cut rates. On average monthly payments are now about 10% less making it more affordable.
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But the the Sellers would have to keep their prices steady. And we can figure that they won’t. If the 30 yr drops that quick now, then the Sellers will think it is The Recovery and start raising the asking price.
I think if the sellers start raising their prices, they will be in for a rude awakening. I think most sellers who have had their units on the market for the past few months will be glad to sell at their current prices or slightly lower. When all the new inventory comes out in the spring and summer, I don’t know how an agent can tell their client that they should raise prices.
Deaconblue,
Do try to keep in mind that the very same leverage works against you in a depreciating market.
They can drop interest rates to 0% (and just might do it, inflation be damned.) Doesn’t matter, without subprime and liar loans there will not be enough buyers that can qualify under more rigorous standards at current prices.
The only thing that will help are price reductions. The sooner they occur the sooner recovery can start. Anything else creates more pain for more people.
I love reading everyone’s comments, but as a current condo shopper, I wonder where the numbers come from. I’m looking for a 1-bed downtown & there is little differential between renting and buying monthly. I’ve rented for 1 1/2 yrs in Chicago & my increase on my 2nd year lease was 10%. (!!)
Six months ago I would pay more monthly to rent, but now I would pay less in a mortgage, including taxes and assn. fees. And with a 10% yearly rent increase, I would be above the “line” in the rent/own calculator after only 2 years with no appreciation in the price of the unit.
Perhaps only 3-bed penthouse dwellers benefit from low rents? At the low end of the market, it seems about equal.
Condoshopper: Where are you renting???
I’ve had several other posts about renting versus buying and it’s much cheaper to rent right now.
Are you in one of the new big apartment buildings? It is cheaper to rent a condo right now.
I’ve seen 1 bedroom condos (about 725 square feet) for as cheap as $1500 a month at The Columbian (new highrise on Michigan Avenue at Grant Park.) They are trying to sell those for over $300,000.
You can rent condos for much cheaper than buying all over Printers Row as well.
Please tell us more information!
There might be exceptions, but it’s still cheaper to rent. I suspect that renting will grow in popularity this year, possibly causing some increase in rent and almost certainly causing decline in condo prices. Expect the spread to close from both ends.
A lot of people are being axed in finance right now, and more are slated in March. Many other corporations are trimming the fat, so to speak, to brace for what most predict to be a bad year. People are CERTAINLY going to be more reluctant to buy in this kind of a job market, not to mention the stricter lending requirements now.
G,
You are certainly correct that leverage can work against you, I’m just saying that during 99% of the time, when the real estate market is slowly appreciating, leverage is a good thing. I think a lot of people focus only on cash flow and forget to include the overall impact on net worth.
D
I agree that right now, in the short term it is cheaper to rent than buy. I sold my place a little over two years ago and will be closing on a one soon. There are more reasons to buy than purely profit, it is your home which you can decorate and furnish as you like. I plan on living in my new unit for at least 10 years. If talk to anyone in a good location who has owned their property for over 10 years they will tell you its a good investment. If you talk to anyone who held there stocks after the 1987 crash will tell you it has been a good investment. A long term plan in any type of investment is the key to profits. My personel option is that over the next 10 years real estate with under perform other asset classes. But you should always look at a diversified portifolio of investments, real estate being one of them. The problem with trying to time any market is that you can miss the boat, that being said I think we have at least 2 years for the market to stablize.
You make excellent points Valasko. Thanks for talking reasonably and realistically.
condoshopper on January 25th, 2008 at 2:14 pm
I love reading everyone’s comments, but as a current condo shopper, I wonder where the numbers come from. I’m looking for a 1-bed downtown & there is little differential between renting and buying monthly. I’ve rented for 1 1/2 yrs in Chicago & my increase on my 2nd year lease was 10%. (!!)
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Your respose should have been: goodbye! The ball is in your court. You don’t exist to make sure the flopper turns a profit. It’s up to you. Feel free to negotiate……
Joem – The cost of movers, moving my cable, new curtains (the old ones never fit) etc. would have equalled any savings on rent. Especially if renting from a flipper with no guarantee of staying long enough to recoup the expense. When a student with a futon and a couple of milk crates it was a lot easier.
I suspect I also see the market as different from investors because I have a “real” dog (over 25 lbs.) so most of these cheap rentals simply don’t apply to me.
Condoshopper: having a bigger dog does make a difference. No doubt about that. But many condo buildings don’t allow bigger dogs either (and some don’t allow dogs at all)- at least in the high rises. So that could be a problem even with buying.
But there are some really juicy rentals out there right now. There are some one bedrooms in the south loop in new buildings for only $1200 a month. Granite kitchen and stainless steel appliances included.
These are great deals for renters. It’s much cheaper than renting in an apartment building.
How do I find out about these great rentals in Chicago. Thanks.