Hi, Bruce !
Buying a home should always be considered as a long term investment,
unless you are the kind of skilled handyman who buys a run-down
property and restores it quickly for resale when renovated (profitable
and very hard work!). The boom cycles are usually pretty predictable
in any one area, (where I live, Sydney Australia, it is a seven year
cycle) and are more often periods of rapid growth versus slow growth,
rather than any real drop-back in values. Actual drops in values are
normally short-term, as people who need to sell (relocating for work
reasons etc) accept lower prices in order to realise their equity.
Those people who are in no hurry to sell don't usually experience a
problem.
Remember, you haven't made either a profit or a loss until you sell !
Just be sure, if your mortgage rate is variable, to allow for it to
increase from time to time - don't commit every spare dollar. Some
mortgages allow you to pay extra into the account, which both acts as
a buffer when the rate varies and pays off the loan appreciably
quicker. It pays to shop around.
The Investment FAQ has some good independent advice at:
http://invest-faq.com/articles/real-es-rent-vs-buy.html
In an article contributed-By: Jeff Mincy (mincy at rcn.com) & Chris
Lott
They say:
"If you are guaranteed an appreciation rate that is a few points above
inflation, buy.
If the monthly costs of buying are basically the same as renting, buy.
The shorter the term, the more advantageous it is to rent.
Tax consequences in the US are fairly minor in the long term. "
Each of these issues is discussed in detail. Formulae such as you are
looking for are included and explained in detail for various levels of
appreciation.
Mincy & Lott conclude:
"Once again, the three important factors that affect the analysis the
most are cash flows, term, and appreciation. If the relative cash
flows are basically the same, then the other two factors affect the
analysis the most.
The longer you hold the house, the less appreciation you need to beat
renting. This relationship always holds, however, the scale changes.
For shorter holding periods you also face a risk of market downturn.
If there is a substantial risk of a market downturn you shouldn't buy
a house unless you are willing to hold the house for a long period.
If you have a nice cheap rent controlled apartment, then you should
probably not buy.
There are other variables that affect the analysis, for example, the
inflation rate. If the inflation rate increases, the rental scenario
tends to get much worse, while the ownership scenario tends to look
better."
First Security Loan has excellent comparison charts on renting vs.
home ownership over one year, fifteen years and thirty years at:
http://www.valley-financial.com/financia.htm
Here, as near as I can reproduce it, is the first chart:
"Financial Freedom Savings are the key to Financial Freedom, not
earnings.
Making money in home ownership:
1. Tax Benefits
2. Increase in value (appreciation is 6% to 8% per year in Sacramento)
3. Principle paydown
RENTING COST OWNING COST
Move in cost $1,400 to $4,900 $770
Rent/Payment $700 $620 *
Save Monthly 0 $80
Fed/State Tax Rebate 0 $120
Surplus Funds 0 $200
Monthly IRA Investment 0 $166 **
Extra Money Roth IRA 0 $34
Interest write-o(Landlord benefit) $7,300
Taxes write-off (Landlord benefit) $770
IRA write-off 0 $2000
Total Tax Deduction 0 $10,070
Equity Buildup 0 $208 ***
Appreciation 0 $256****
Rent Increases 3-5%/year 0
Property Improvements (Landlord benefit) Increases Value
*Principle, Interest, Taxes, Insurance & Homeowners Association
Assessment
** $2000 per year
***Averaged over 30 years
****Averaged @ 4% per year"
The benefits of course improve the longer you are in the home, as your
equity increases.
Mortgage Rep at
http://www.mortgagerep.net/rent_vs_buy.htm
has a similar comparison. over a ten year period as well as mortgage
calculators and other useful information.
Remember, both those last two sources have a vested interest since
they are mortgage loan companies, so you may want to check their
figures with your accountant.
Lastly, Domania is an excellent site for researching property prices
in any area from 1987 to the present, plus some other useful tools
including a mortgage rate finder.
http://domania.com/
By entering in a street address they will email you details on the
immediate area in which you are interested, and you should be able to
work out patterns from that.
I hope this is useful. Please note that I am not an investment advisor
and you may wish to consult your own accountant or financial advisor
On a personal note, making the decision to buy rather than rent was a
decision I have never regretted , but regard it as a long term
investment and look for a home that you really like and will enjoy
living in.
Good luck.
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