Rent or Buy? Reporter Tries to Sort it Out for Herself
WBEZ recently got an email pitching a book called, Buy, Close, Move in! In all caps it screamed: “Right now is the chance of a lifetime…Waiting too long to buy could cost you dearly.” Almost takes you back to 2005, huh? Well, home prices in Chicago are falling and the homebuyer tax credit expires today. So long-time renter and WBEZ reporter, Ashley Gross, set out to see for herself how the housing slump has changed the rent vs. buy calculation.
ambi: moving furniture upstairs
MOVER: Okay, set it down, set it down.
Just a couple of weeks ago we had movers shlep our stuff to a new apartment in the Lincoln Square neighborhood.
SPITZER: The bedroom up front that's carpeted – if you could put that bedframe in there that'd be great. Thank you.
My husband Gabriel and I needed more space because we're about to have a second baby. This place has 1,300 square feet with two and a half bedrooms and two bathrooms. Plus, in-unit laundry and dishwasher. To us, this is like Shangri-La. But I have this nagging feeling we're missing out by not buying. I ask Gabe if he feels that way.
Let me just jump in here and say, if you listen a lot to this radio station, you may recognize his voice.
SPITZER: I mean, the part of me that doesn't want to do this again for a thousand years I guess wishes that we were moving into somewhere that we were going to settle in permanently, but I also feel free. So this to me – this is freedom.
Okay, good point. But prices have dropped so much it's hard not to feel like we are missing the “chance of a lifetime.” Plus when you have kids it feels like that's just what you do – buy a home. So I arranged a little test.
GARY LUCIDO: So you want me to go ahead and set you up in here?
GROSS: So this is the MLS?
I asked a realtor named Gary Lucido of Lucid Realty to help me.
LUCIDO: This is my monthly cost spreadsheet.
I asked him to figure out what we could buy in our neighborhood for the same 14-hundred dollars a month that we pay in rent. Taking into account stuff like property taxes, condo assessments, and the mortgage interest deduction. He starts plugging in numbers.
LUCIDO: I'm going to just guess $250,000.
One reason I turned to Lucido is that I didn't think I'd get the hard sell from him. He has an MBA and used to work in corporate finance. And get a load of this – he's rented for the past 11 years.
LUCIDO: Whenever I did the rent versus buy decision, renting looked cheaper. And in fact, it has remained cheaper until recently. I'm now for the first time – I'm actually putting offers out.
To me, the fact that he's a number-cruncher and he's now looking to buy carries a lot of weight. For my search, Lucido and I looked at our rent and figured Gabe and I could pay a max of $225,000 with 10 percent down. The search only pulls up a couple of condo listings in that price range. One is just $89,000 but looks totally crummy. Another looks nice but is too tiny. We find a 2-bedroom rehabbed condo listed for $212,000. It doesn't say how big it is.
LUCIDO: This is like the only thing within your budget that even has a chance in the area.
So he and I make a plan to go look at it. First, though, I want to figure out the economics.
One thing to look at is the price-to-rent ratio. Take the median home price and divide it by the average annual rent. Moody's Economy.com says right now for metro Chicago the ratio is about 16, down to what it was before the boom. In 2006 it reached 24, which meant home prices were pretty inflated. But I still need a little more perspective.
STUART: I'm Ed Stuart, professor of economics at Northeastern Illinois University.
He says a lot of people – including his students – are not as sure about buying these days. Home prices have dropped, but the job market is still not great. Assumptions we had about price appreciation have been tossed out the window. All my life, my parents and my friends have told me buying makes way more sense than renting. The government subsidizes it. And it's a kind of forced savings. Plus, they all say renting is throwing away your money.
STUART: No it's not throwing your money away because you're getting housing services. You're buying something.
By the way, Stuart also rents. Maybe I'm just drawn to contrarians. He says people should look at renting like leasing a car.
STUART: People don't say you're throwing your money away when you lease a car because cars pretty much depreciate all the time, right? And real estate has appreciated at times but as we know at times it depreciates as well.
Stuart says he wants to save for retirement and can find better investments than a house. He points to economist Robert Shiller, who created a home price index going back to 1890.
STUART: He came to find out that over a fairly long period of time owning a house is a pretty bad deal compared to stocks or bonds or other kinds of financial assets – that house prices don't go up that much and in fact, correcting for things like inflation, they stay pretty constant.
But Robert Shiller also writes about the benefits in his book Irrational Exuberance. Owning a home offers tax advantages and gives what he calls psychic dividends that are hard to put a value on. You get that pride of ownership. On the flip side, you also have to take care of the place. Our friends – Mara and Nate Block – have also been grappling with these questions.
MARA BLOCK: And they've primed the whole hallway getting ready for painting – ooh and they painted the side bedroom, ooh, and they painted Mikaela's room! Looks so nice!
They decided to buy. Workers have been painting their new house in Oak Park, and today is move-in day.
BLOCK: It's really pretty, it's like cantaloupe.
We have a lot in common. They've always rented. Their daughter is our son's age. And like me, Mara says she's felt that urge to nest. Even though her husband Nate was just fine with renting.
BLOCK: I think for him it was an advantage not to have that commitment, but for me I sort of felt like, that's kind of what adults do and it's time for us to be adults.
Of course it wasn't just about that. They needed more space, they wanted a yard, they wanted to be in a good school district. And Mara says for them the financial equation tipped in favor of buying.
BLOCK: Listen if we want to move to an apartment that's going to accommodate what we're looking for, we're going to be paying $500 or $600 more, which is going to be more than we'd be paying in a mortgage payment. That doesn't make a lot of sense.
But they also have to buy new appliances and pay for repairs – all of which are expenses Gabe and I couldn't afford. We'd need a place we could just move into. But I want to see what's out there. Remember that condo my realtor found in my neighborhood? Now we're ready to go check it out.
GROSS: How many units are in the building?
REALTOR: There are ten units in the building.
Gary Lucido and I are getting a tour. The place is nice – the realtor points out the maple cabinets, limestone kitchen floor, granite countertops. But it's a lot smaller than what we have.
REALTOR: It's listed as a two-bedroom because it's unique. It's really a one-bedroom with duplex down for a second bath and den area, but there's no way to put that in the computer.
It's charming, but it'd be hard to live here with two kids. Plus there's no garage spot, like we have at our place, and it's a farther walk to the El. This buy versus rent comparison satisfies my curiosity for now. We're going to keep unpacking and settling into our temporary digs.
GROSS: Come here, Ezra. Here want to see what's in this box? Come over here, let's see what's in this box.
EZRA: Box, box, box.
Really I think it all comes down to mindset. Gabe and I just aren't ready to make that commitment to own a home. If we were, we'd look in cheaper neighborhoods. But right now we appreciate renting a garbage disposal and washing machine and being able to call our landlord if one of them breaks. Thanks, Ray!