It seems that with some regularity we get a story from some real estate information provider about how buying a home totally trumps renting a home. The last time I debunked one of these stories was a couple of years ago: The Math of Renting vs. Buying a home in Chicago. Now Zillow has come out with some research on rent vs. buy economics and issued this press release: New Zillow Report: Buying Twice as Affordable as Renting, which included some very confusing data on Chicago housing affordability along with data for more than 30 other metro areas and the country as a whole. Their information left me scratching my head for a few reasons and I finally concluded that their analysis is just way off base.
Let’s start with the headline: Buying Twice as Affordable as Renting. What the heck does that even mean? How can something be twice as affordable? Do they mean buying is half the cost? Or renting is twice the cost? I think so. Then why not say Half The Cost or Twice The Cost instead of using nonsense language?
I can get past their awkward language but then we get into the housing cost data for Chicago and, using the same language they use for discussing the national data, they claim that “Homebuyers should expect to spend 14.0 percent of their incomes on mortgage payments for a typical home. Renters should expect to pay twice as much — 31.5 percent of their median incomes — to rent.” And, based on other statements in their research and press release, they are using mortgage payments as a proxy for the affordability of home ownership. Now doesn’t that sound like they are saying that renting an equivalent home will cost you twice as much as buying a home?
But I can assure you that this is absolutely not true in Chicago for the simple reason that if it were true I would be inundated with investors trying to buy all manner of housing and renting it out for twice what it costs them to own. In fact, I would be selling off all my investments and buying condos and houses myself.
So is something else going on here? First, I emailed back and forth with one of their PR people to make sure I was understanding the data correctly. I confirmed that they are looking at renters and home owners at similar – median – levels of income and they are looking at the average housing people of those incomes are buying/ renting.
I think we can rule out that renters are living in higher quality housing. Although that’s theoretically possible I think there is a much more logical explanation of what is going on here: Zillow is only looking at about half the cost of owing a home. Here is what is missing when you only look at mortgage payments:
- Property taxes
- Homeowner’s assessments
- Maintenance/ periodic remodels
- Opportunity cost of down payment
Those are significant misses. For instance Chicago property taxes typically run 1.8% of the property value per year. That’s almost half the interest cost of the mortgage. And assessments in a nice high rise building can often run about 1/2 the mortgage payment.
To be fair they are also overstating some of the costs of home ownership. For instance, they are looking at the entire mortgage payment as a cost when in fact only the interest portion is – though the principal repayment portion does represent cash out of the pocket. And they are ignoring the tax benefits of home ownership.
To be sure the rent vs. buy analysis is more complicated than I can get into here or Zillow can cover in an analysis like this. That’s why I always recommend using the New York Times’ rent vs. buy calculator. Individual results will vary but usually it is unlikely that home ownership will be half the cost of renting.
#ChicagoRealEstate #RealEstate #rentvsbuy
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