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Lansner: Advantage of renting over buying is thin

Lansner: Advantage of renting over buying is thin

Renting’s current edge is still below the 42 percent average gap seen in Orange County over the past 25 years.

With local rents at record highs and mortgage rates – key drivers in the homebuying decision – still near record lows, should traditional rent-vs.-buy math still hold?

It’s a classic personal finance calculation for one of life’s grandest decisions: the costs of ownership compared with what a landlord would charge.

When I look at Orange County’s overall rent-vs.-buy math, my trusty spreadsheet tells a hypothetical potential buyer that the financial edge of renting is below historical norms as rents rise.

My calculations compare an “effective rent” adjustment to RealFacts’ quarterly average local rent at major complexes – multiplying it by the occupancy rate to see what landlords are collecting – with estimated monthly house payments for buyers, which CoreLogic calculated by combining sales prices, down payments and average mortgages rates.

When I smooth out the statistical bumps by looking at moving averages of a year’s worth of data, I find:

• In the 12 months through the first quarter of 2015, Orange County’s effective rent – what landlords received after concessions and discounts – averaged a record high $ 1,685 a month – up 5 percent from the previous year. The last time effective rents rose faster? 2007!

• Orange County’s corresponding home purchase cost averaged $ 2,709 a month over the same 12 months – up 8.9 percent from the previous year.

• That translates in my rent-vs.-buy math to Orange County renting being 38 percent “cheaper,” a relatively slim margin considering a hot job market and cheap mortgage rates – common spurs to the home-selling market.

Someone pondering ownership might note that this level of savings for renters is greater than the slim 22 percent we saw in 2012. But it is still below the 42 percent average gap seen in Orange County over the past quarter century.

Honestly, no metric is perfect – and each renter/shopper will have his or her own math. If they’re serious about buying, a significant down payment and decent employment and credit histories are required.

And nothing can capture the unpredictable costs of owning a home (from taxes, tax breaks, insurance and association fees, to repairs and swings in real estate values) or the somewhat hidden expenses of renting (lack of investment potential and frequent moving costs).

Of course, homebuying is not just about the numbers. The emotional tug of setting down roots carries weight in many households. As does the anxiety of having a large investment at the mercy of the real estate gods.

With all those variables in this financial puzzle, if you want anything close to a guarantee in the housing market, it’s that rents will go up.

For example, Orange County’s rents have dipped roughly once every seven years since 1989. Housing costs fall once every three years.

Those home values swing more violently, too. Homebuyers’ costs go up and down four times faster than my rent benchmark, using standard deviations – a common measure of volatility.

The Orange County Register – News Headlines : Real Estate News