Rent or own on Bainbridge Island? The $640,000 real estate question~

A fascinating New York Times article yesterday called up the age old question: is it better to rent or buy? Typically the people who ask that are first-time home buyers, but it may be that folks sitting on big mortgages are starting to ask that question, too.

Conventional real estate wisdom was always that it would take two to five years to break even if you bought and had to sell again. Until the 1970's, people bought for a number of reasons not tied to economics and with the hope of someday owning their home free and clear.

But then we started to see steady and sometimes huge appreciation, and for many people, their home's growing equity exceeded their income. Putting it another way, a lot of people's disposable "income" has been coming from spending the wealth their homes were generating. Now, not.

Hence the question, is it better to own or should we give renting another look? The Time's article mentions cities and regions that have had a huge real estate drop after a huge bubble--some as much as 50% decrease from the top in 2007. Where that has happened, or where housing prices have been relatively stable, and using a clever formula,  it shows that now is the time to buy, buy buy.

Seattle is listed as one of the areas where it doesn’t make sense to own. I applied the formula to my own home to get a sense of how it would work, and clearly someone would do better financially to rent it than to buy it. On the other hand, my son in Houston is in contract to buy a home there. The formula says he’s really smart to buy. (Divide the price of the home by the annual cost of rent and use the rule of 20. If the number you get is below 20, it may be better to buy.)

Why does Bainbridge Island score poorly in this equation? I think two factors are at work here: our rents have stayed low for years—seems like they've always been about a buck a square foot. That could change if an increased demand by renters drives up rents. Time will tell. Furthermore, we have a very stable population with values that would lead to home ownership, and those values are intangibles, not measurable in a formula, but important nonetheless.

But, consider someone in a 3,000 sqft home paying a $5,000 a month on their mortgage, taxes, insurance, repairs, upkeep, etc. Assume they've watched their equity disappear as the market value has dropped. Unfortunately, this isn't a rare situation on our Island. In this circumstance, it's probably tempting for a homeowner to want to sell, get out from under the debt, rent a similar home for $3,000 and pocket $2,000 a month in the process.

The Broker/Owner of my office, Jim Laws had this to say on the subject:

"There is the whole physiological side of renting vs. owning. For some (many?), having a base of their own is important. A home represents different things to different people, and for some it is more than simple dollars and cents or potential returns. Indeed, I have always felt the potential return was a side benefit to home ownership, not the only reason to own. I would venture to say that even if renting was a better short term financial decision, most would prefer to own their own home. It is a crazy world and having a place you feel is yours (even though the bank is your ever-present partner) brings a feeling that transcends purely financial considerations."

I'd love to hear others' thoughts on this subject.