Over Time, Owning a Home Really Pays Off

By: Ascribe News: REALTOR® Magazine Online
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 U.S. housing markets they studied – San Francisco. In every other market, buying a house is an excellent long-term investment, they conclude.

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 Indianapolis, owning a home generated an immediate positive cash flow.

But the bottom line is personal, says Smith. “You’ve got to run your own numbers.