The most expensive thing you will ever buy is a house.  It deserves more research than just checking that you can manage the payments.  Sure, there are a number of non-financial reasons to own a house. You don’t have to deal with a landlord (just the HOA), you can knock down some walls (if they aren’t load bearing, and the city/HOA let you), you are a “homeowner”.  These things might matter a great deal to you.  They might matter more than the financials.  There are also non-financial reasons to rent.  You get more flexibility about where you’ll live from year to year.  The financial calculation, however, is complicated but well defined.  There are dozens of variables involved. Unfortunately for you, this calculation is non-optional.  Fortunately for you, the New York Times has taken all of the relevant variables and made a nifty calculator.  You officially have no excuse!

The only housing valuation calculator you may ever need.

The Calculator

Reverse Engineering

The real value of this calculator shines through when you work backwards from a known rent.  For example, let’s say that I’m trying to decide between buying a condo that rents for \$1,800 and is selling for \$225,000.  I use default values for everything, and change investment return rate to 8%.  I also add in monthly common fees (HOA fees) of \$400.  The last thing I change is the home price growth rate, and I adjust it until the big green number on the right is \$1,800.  This solves for the growth rate that breaks even. In my case that growth rate is -0.8%.  If housing values fell 0.79% per year over nine years (the time I owned the home) I would still come out ahead by buying.  By running these sorts of scenarios you can see what works and what doesn’t.  Looking at another example, a single family home near my area is selling for \$365,000.  A very similar home is up for rent at \$1,600 per month.  HOA fees are much lower in this area, so I adjust for that.  The value of this home has to increase by 3.2% per year in order to justify the purchase, this may or may not be reasonable.

I’ve done this too many times.

Upshot

I say it one last time.  A house is your largest purchase, interest rates are very low and it may therefore seem like buying a house is the right idea, but do the math!