Wednesday, February 3, 2010

When to Buy a House?

Buy Ketchup in May and Fly at Noon: A Guide to the Best Time to Buy This, Do That and Go There

Another in my series on "Buy Ketchup in May and Fly at Noon":
WHEN IS THE BEST TIME TO STOP RENTING AND BUY A HOUSE? When it costs less to buy than to rent. And how do you figure that out? Find two similar houses—one for sale and one for rent—and divide the asking price by the annual rent. The answer is the rent ratio. During the 1970s, 1980s, and 1990s, the nationwide rent ratio stayed between 10 and 14, then rose to nearly 19 in 2006, when the housing market topped out. (The rent ratio neared 35 in San Francisco and San Jose in 2006, among the highest in the nation back then.) A rent ratio of 20 or more usually means that it costs considerably more to own than to rent, once you factor in the mortgage, taxes, insurance, repairs, and other expenses. Ideally, you’ll buy when the rent ratio is a lot closer to 10 than to 20.
(Read all of my posts on this book here.)

While the rent ratio may be a good rule of thumb, it is not the only factor a potential homebuyer should consider. Interest rates are also important, as a few percentage points can mean thousands of dollars over the course of a 30-year mortgage.

More importantly, although owning a home builds equity, it can also be a very dangerous investment, as evidenced by the recent housing debacle. Many homeowners are now underwater, owing more money on their homes than they can sell them for. They can't afford to leave, and they can't afford to stay; they wouldn't run this risk as renters.