Buy vs. Rent

The New York Times has a fascinating Flash-based Buy vs Rent calculator that is much more interactive and detailed than any other calculators I have seen on the web.

If I plug in the numbers I'm currently considering and leave all the interest rates at their defaults, I get the surprising result that buying is better than renting only after 26 years, with a net difference at the end of $72,000:

But, switching the "Annual home price appreciation" from 2% to 4%, it's better to buy after only 8 years, and the net difference is $400,000:

In other words, which is better is so completely dependent on what the market does over the 30 years that it's hard to make any good predictions. So despite playing around with the calculator a whole bunch, I'm still at square one in terms of my decision.

One interesting thing I did note is that changing the down payment percentage has almost no effect on the final result, because this calculator accounts for all the opportunity costs (that is, it assumes that you will invest the money you save by renting in the stock market). So in terms of the final net result, there's no reason to make a bigger down payment if you have the money, because you'd be just as well off investing that money in the stock market instead. Similarly, it seems to follow that there's no reason to wait a few years and save up for a bigger down payment, since at that point you would have the same choice (though I have not thought this one through completely). Obviously this doesn't account for other non-strictly financial benefits of having a large down payment, such as the lower risk in case something goes wrong.

By default the calculator assumes a 5% rate of return on investments, which is a pretty low estimate - that's what I get on my regular savings account, in the long-term the stock market will average much better. If we change it to 10% (not unreasonable), we get this fascinating graph which says that buying is always worse than renting, and after 30 years a renter would have $570,000 more in the bank:

Twiddling with the home appreciation price slider at this point leads to wildly different graphs, so it's obviously impossible to make any good conclusions from it.

If anything, what I'm taking away is that renting is not necessarily that bad of an option compared to buying (despite what the real estate & mortgage industries would tell you), and that renting for one more year will not make a huge difference in the long run - who knows where I will be in a year, it's entirely possible (though improbable) that I could be married and thus be looking for a completely different type of house. Hrm..