Daily
Real Estate News | April
4, 2006
Over Time, Owning a Home Really Pays Off
Compare the
cost of owning a home to the cost of renting a similar property and you'll see
that real estate bubbles do not exist in the vast majority of U.S. markets,
says a pair of economics professors from Pomona College, located in Claremont,
Calif.
Professors Gary Smith and Margaret H. Smith found bubble conditions in only one
of the 10 metropolitan
In each market they studied, the Smiths matched up similar homes and compared
the cost of buying versus renting, using Multiple Listing Service data from
summer 2005. They projected home owners' savings on rent over time, discounted
by a required after-tax rate of return of 6 percent because the money sunk into
the home purchase could have been invested elsewhere — for example, in stocks
and bonds.
The analysis factored in expenses such as one-time closing costs, taxes,
maintenance, and insurance. On the other side of the ledger, they also factored
in tax benefits from ownership and the fact that rents will rise over time,
while payments on a fixed-rate mortgage will not.
They assumed a 20 percent down payment, with a 30-year mortgage at a 5.7
percent fixed rate.
Under the Smiths' model, many home purchases initially generate negative cash
flow, as the expenses of owning exceed the rental value and tax benefits. But
over time, cash flow becomes positive. And in some of the more dramatically
undervalued markets, such as
But the bottom line is personal, says Smith. “You’ve got to run your own
numbers.”
