You'd Be Smarter to Rent

Ask someone whether you should rent or buy, and almost unanimously you'll be told to buy. Rent, people argue, is akin to throwing away money - you're lining your landlord's pockets! Throw in the dizzying rise in home prices, the tax benefits on interest rates for primary residences, and it's a no brainer, right?

Wrong.

With home prices as grossly over-inflated as they are today and with rent prices at much saner levels, the smart consumer today will opt to rent rather than buy. A recent Economist article - Still Want to Buy? - highlights the growing disparity between rents and home costs, as the following graph illustrates:

A ratio of 100 is the average home to rate cost ratio. However, around the world this century has seen a dramatic and alarming rise in this ratio. While the rise is less than in many other industrialized nations, it's still around 30% higher than the average. The Economist article puts it all into focus with this quote (emphasis mine):

"The figures look even more striking in the San Francisco Bay Area, where it is possible to rent an $800,000 house for $2,000 a month. Making the same assumptions about rents and house prices, but also deducting tax relief on a fixed-rate mortgage and adding property taxes, a buyer would pay $120,000 more over seven years than if he had rented. House prices in San Francisco would need to rise by at least 4% a year (2% in real terms) for it to prove cheaper to buy a house. Since 1950 American house prices in real terms have risen by an annual average of just over 1%. To expect them to rise faster from their current dizzy heights smacks of irrational exuberance, to say the least."

If you are not currently in the house market and are considering buying, hold off - rent costs have never been so low.