Renting a House

I need somewhere to live while I'm house hunting, and I've been thinking of renting a house instead of an apartment. I've never lived alone in a house before, so I figure it won't hurt just to get a feel for the thing. Most people seem to think that house rentals are expensive and a tremendous waste of money, but that doesn't agree with CEPR (Center for Economic Policy and Research) Housing Cost Calculator. The calculator, given the input of mortgage downpayment, interest rate, region of country, tax bracket, length of ownership and house cost, comes up with the rental rate for which you'd be better of renting than buying. Note that the main assumption of the calculator is that housing has been in a bubble since the late 1990's, and you won't be able to sell your house for as much as you paid for it.

For example, a $150,000 house with a $25,000 downpayment and a 6.36 mortgage for somebody in the 25% tax bracket who itemizes is assigned a basic cost of $900 a month, for a 30 year mortgage, and if you can rent for less than $600 a month, you'll be better off. Change to the standard deduction on taxes, and renting for $700 a month would leave you ahead. You would think a higher tax bracket would make the interest deduction work more, but according to the calculator, people with high incomes are better off renting than people with low incomes.

The main thing that changes as you move around the country is the house appreciation, which is inversely related to how bad the bubble in the region is perceived to be. Quoting from their help, "the Housing Cost Calculator assumes that the path for all home prices, from 1997 until the owner's projected sale date, will follow the historic average path of home sale prices nationwide." So far, I've plugged a large number of regions into the calculator and they all show negative appreciation (i.e., depreciation) in the value of the house over the period of ownership, whatever that period is. It's a fair way to do it, since nobody can predict when a bubble will deflate, and there would be no reason to construct such a calculator with a false prophecy that would get people thinking that there's still plenty of time to flip a few homes.

The Boston/Quincy area is expected to fall 50%, while lucky buyers in Erie, PA, need only worry about a single digit decline. Most of the California regions I looked at are expected to fall over 60%, but upstate New York is in the single digits to low teens. What it's saying, of course, is that the regions where people want to live have ended up with the highest prices, and therefore are prone to the largest losses, assuming that there's no underlying reason the housing prices should have soared ahead of inflation. As I mentioned in an earlier post, I can think of one reason housing prices have run up, namely that they may be reflecting the true inflation in the economy, which the CPI index woefully underestimates. I don't know if that's due to the huge current account deficit with China, or simply due to change in the way people live, but if the value of the dollar falls by half and everybody's income doubles, all of a sudden a house in Boston will look like a reasonable deal, and anybody with appreciable cash savings will be a loser.