Buying Beats Renting – Part 2

A previous post explained why buying a home is more financially advantageous than renting in the current Denver market. It was an argument made in a Trulia post I read recently.

As good as it was, the article left out one variable that I wanted to explore a bit — namely, appreciation in the value of the home.

In the Trulia piece, they rightly allowed you to play around with interest rate and tax bracket and length of stay in the property to see how those items affect the buy vs rent decision. However, in all cases, they hard-coded an annual property value appreciation figure into the analysis.

It would be great if they had allowed us to play with this variable also.

For example, Trulia’s 5-page white paper explaining their methodology has a sample case of buying versus renting in Seattle for a person in the 25% tax bracket and a mortgage of 3.5% and staying in the home for seven years. The annual appreciation rate in Seattle is assumed to be 2.6%.

It turns out that buying is 42% cheaper than renting given these assumptions. However, what if the appreciation was different over the seven years?

Interestingly, even with no appreciation in property value, the buy vs rent comparison would be neutral — you’d be no worse off from having bought.

On the other hand, if appreciation was just one-half percent higher at 3.1%, buying would be 49% cheaper than renting. At 3.6%, buying is 59% cheaper.

In other words, there is a very favorable risk/reward pattern. Even if appreciation is substantially worse than expected (0% instead of 2.6%), you don’t lose money by owning. Conversely, even a small increase in projected appreciation rate (from 2.6% to 3.6%), boosts your buy vs rent savings from 42% to 59%.

Nothing is a sure thing. Property values might go down while you own the house. That has happened to many people in the recent past.

But even if values goes down some during ownership of a property, many people find value in owning beyond just the dollars and cents. Even if it costs a couple hundred dollars more to buy, people get value from creating the space they love and that reflects their personal tastes. It is just nice to know that the odds still favor buying as a good financial decision.

Play around with the Trulia Interactive Calculator. You can adjust interest rate, tax bracket and length of home ownership (but not property appreciation rate, unfortunately). Then point to the Denver circle and you’ll see a summary of buy vs rent advantage. Enjoy.