WCL: Buy or Rent?

Deal Estate's Dennis Rodkin tells us which will save your more money.

Until a few years ago, the question of whether to buy or rent a house wasn't often asked: for the most part, people who felt settled down and could afford to bought, and the rest rented.

But particularly since the drop in home values that started in 2006 and hasn't yet fully stopped, answering the question has become more complicated. Some people who can afford to buy have seen such catastrophic losses in home values that they aren't willing to get into the home-buying market; some former homeowners whose credit was strained by job loss, foreclosure and other financial distress have become reluctant renters; and many people who are preparing to move to another home or even another city want to know which is the best way to spend for housing. On the one hand, it's a great time to buy a house, because of the double boost affordability has received from both declining home values and super-low interest rates. A buyer with a solid financial history can afford more house now than at any time in many years.

But on the other hand, renting is appealing for people who need flexibility because they either don't know how their needs will change over the next several years or don't have a strong enough financial profile (good credit and savings for a big down payment) to buy.

BUY vs. RENT INDEX is calculated this way: Divide the price of for-sale housing by the annual cost to rent comparable housing (annual cost = monthly rent times 12).

If the result is:
-10 or less: Buy, even if you plan to live there less than 5 years (depending on moving and closing costs)
-11 to 15: Buy only if you will be there 5 years or longer
-16 to 20: Rent, depending on some tax and income considerations (for instance, would the mortgage interest tax deduction for homeowners make a significant difference in your tax filing?)
-20 and above: Rent

For Spring 2012, Trulia found that the Chicago market overall is in the strong buy category, with a Rent vs. Buy score of 8.

For other cities, the scores were:
-San Francisco: 14.8
-New York: 14.7
-Los Angeles: 12.5
-Miami: 10.1
-Washington DC: 9.9

In other words, in most major cities, it's cheaper to buy than to rent.

Of course, this all assumes that you have the money for a down payment --and that's harder these days, considering that the days of financing 95 percent to 100 percent of the purchase price are gone, and that even a 10 percent or 15 percent down payment will not qualify you for some loans.

We are took the Rent Vs. Buy question down to a more local level, to see how the numbers work in four Chicago-area locations: Lakeview in the city and Crystal Lake, Mt. Prospect and Naperville in the suburbs.

Dennis can't measure with the scientific precision that Trulia uses on major cities, both because there's not enough data for these small locations to be precise, and because in some locations, information on rentals is hard to nail down because many rentals are individual properties owned by individual landlords and not registered in any large, universal database.

But here's what he found:

Lakeview: 15.3
It's not surprising that Lakeview would land right on the border between buying and renting; it's a neighborhood with a pretty even mix of for-sale and for-rent housing. Niko Apostal, a Coldwell Banker agent in Lakeview, found for me that the median price of three-bedrooms for sale right now is about $497,000, and the median asking rent for three-bedrooms apartments is $2700.

Crystal Lake: 9.9
Crystal Lake is a strong buy. Maggie Lucchetti, a Baird & Warner agent there, found that the mid range of three-bedrooms for sale is about $275,000, and for rentals, it's $2,300 a month.

Naperville: 10.5
Naperville is in the range of a strong buy, but it's just over the line. It's a place where you should think about renting if you're not sure you'll be there for five years. Mid-range three-bedrooms for sale are in the $380,000 range right now, and a comparable rental would be right about $3,000 a month. By the way, that five-year idea is partly because we believe that within 5 years, prices will have risen enough to cover the costs of a sale (closing, property taxes). But keep in mind that in most parts of the region, prices haven't yet consistently shown they're going up. They're flat or still falling slightly. If they don't get moving consistently upward within the next year, then the five-year horizon gets pushed back.

Mt. Prospect: 10.3
I was surprised that the needle wasn't farther over into the rental side of the dial, because it has long had a stock of rental apartments and townhomes, so they'd be priced competitively. But here's what's happened there: since the peak in 2006, home prices have dropped a little more than 31 percent there. That's in the worse half of the declines around the region --everybody has dropped in those years, and Mt. Prospect has dropped more than at least half the towns and neighborhoods. That has pulled the needle back over toward buying. A mid-range three-bedroom for sale is priced at about $260,000; to rent something similar, you'd pay about $2,100 a month.

About Dennis
Dennis writes Deal Estate: The Blog, which is the online extension of Chicago magazine's monthly "Deal Estate" column. On the blog, Rodkin-who has been covering the local housing scene for Chicago since 1991-provides timely updates on new homes to hit the market, recent high-end sales, and other residential real-estate news from the city and suburbs.

For more info go to: www.chicagomag.com/Radar/Deal-Estate