dckleins

How Ivory Tower Economists Created the Housing Bubble

I'm really glad you wrote about this topic. My wife and I have been looking to buy in the Chicago area, but we knew we were going to be moving in about 5 years time. I became obsessed with the idea of "renting vs. buying" and build an "all-in" model to compare the breakeven points between buying and renting. What my model basically showed me was that once you've factored in interest, closing costs, tax effects (property tax AND personal deduction), assessments, insurance, appreciation/depreciat... and selling commision, if you compare that to what you could earn by investing your downpayment at a nominal rate, and saving the difference between rental rates and the "all-in" buy rate, you almost always have to live in a house for longer than 15 years with a 30-year mortgage to have it make sense to buy. If you use a 15-year mortgage (does anyone?) you can cut the breakeven point to about 7 years for an average property.

But, what's interesting is to compare this to average homeowner statistics, particularly urban. Anecdotaly, most people I know in Chicago live in a home for 3-5 years, and they all swear they made money when they moved out. That may be...

But, once they remove all of the external costs of buying from the pure nominal appreciation (particularly by removing the closing closing costs and selling commission) their returns are dwarfed by what could have made had they just put their money in a money-market account...and would have had returns with substantially less risk than owning.