Break-Even Year/Rent/Apprec. Rate
2/%1500/4%
etc.

For background, I am an electrical engineer in central Iowa. We were never fortunate enough to be swept away in a real estate run-up in the past 10-15 years here, and there appears to be less of a softening in the market as a result. We’ve just seen very steady 4-5% average annual appreciation per year, including 2006. The latest Story County assesor’s news release reported an average of 10% increase in assessed residential properties, but I think that is a bit high.

The Iowa median home value is $76,346–well below the national level of $136,625. Median income is $38k. We have a lower-than average unemployment rate of 3.9%, versus the national average of 5.7%–so there are more per capita “potential” homeowners.

Spreadsheet Setup: A month-to-month balance sheet showing total assets and liabilities.

Constants: Our “effective” property tax rate is about 1.75% on a large 4-bedroom home for which we paid
$185,000. We have two children and a 3rd on the way, so this size makes sense. We have a 15-year fixed-rate loan at 5% for 80% of the value of the home, we pitched in the 20% down payment. We also budget $41/month per month in home insurance and $50/month for miscellaneous maintenance costs that do not add value to the home. It is a new construction, so this is a pretty reasonable assumption. We don’t factor in any income tax benefit from mortgage interest. For the rental scenario, which requires less month-to-month cash outflow, any additional cash up to the total outflow from the mortgage scenario is assumed to accrue 5% interest. Conservative, but safe.

Variables: The only variables are the rent payment and home appreciation rate.

My “Personal” Break-Even Point Results: I thought a table would best consolidate the data for each scenario. These results, if nothing more, emphasize that homeownership should be for the longer-term.

Break-Even Year Rent Apprec. Rate
2 $1500 4%
5 $1350 4%
10 $1200 4%
2 $1750 2%
5 $1650 2%
10 $1500 2%
2 $1150 6%
5 $1025 6%
10 $825 6%

But for me it’s more about the hassle. I don’t really anticipate staying in one location for more than a few years at a time, nor do I really like the idea of being tied down to a specific area.

In my opinion, real estate will be flat to negative for the foreseeable future. The recent runups were only supported by temporarily low interest rates and the issuance of suicide loans by lenders who simply sold these loans, either to Fannie Mae or to Wall Street as “mortgage-backed securities”.

Fannie Mae has stopped buying these loans and are forcing buy-backs of many. Wall Street is filing lawsuits over fraudulent applications and wants nothing to do with these toxic securities any longer. The currently sky-high prices are NOT supported by incomes and are, therefore, unsustainable. Your calculator was right, Flexo.

For more information on the real estate market, go to http://www.patrick.net.

Robin: I agree with houses vs. condos. I’m not sure if it makes sense to wait and save up to buy a house in a few years rather than finding a condo this year.

FT

So why is does your title state it is better to rent than to buy?

i think you meant it will never pay off to buy.