Costs of renting vs. buying diverge – but there’s a reason for that

So, economists, analysts, and the media have all jumped on this idea that housing costs MUST decrease, because the cost of buying vs. the cost of renting has diverged.   I’m in the minority who think there is absolutely no logic in this thinking.

Comparing renting to buying makes sense to some, because, they figure, people have to live somewhere.  If they don’t rent, they own, if they don’t own, they rent (or like me, sleep under the Broadway bridge).

There’s way more to this, than a simple comparison of one to the other.  Sort of like with driving – you might think, well, if gas prices go up, people will stop driving and start taking public transportation.  However, as we all know, this just doesn’t happen.  Some people will never take public transportation, for many more reasons than just the cost of gasoline.

Here’s a couple of quotes from a recent New York Times article, about sisters looking for a place to rent in New York City:

The sisters scoured the Internet, finding a handful of places in their price range. But when they visited, they were “totally and utterly aghast,” Dr. Chung said.

“When you walk around New York, you don’t pay attention to what is above eye level. All these storefronts – the delis and manicure places – they are five-story buildings with apartments. I had no idea.”

Behind those unnoticed doors were rickety staircases and smelly hallways. Some places, still occupied, were cluttered with laundry and beer cans.

(Their rental agent) grilled them about what they did want: a real apartment in a real building, not a tenement. “I call them ‘adult’ apartments,” Mr. (Doug) Hochlerin said. “I said, ‘I will show you exactly what you want to see, but it will cost you.’ ”

Mr. Hochlerin had another near miss: a big two-bedroom for $2,450 on East 71st Street. “Everything was perfect except the kitchen didn’t have ample counter space,” he said. “As a broker, I’m like: Get one of those little rolling cart things or butcher blocks.”

But then, he found a listing that sounded ideal – a two-bedroom also on East 71st Street, renting for $2,600. He had trouble reaching the listing broker, who was away for a long weekend. It took him a week and a half to line up an appointment.

When Dr. Chung was finally able to get inside, “I could not believe my eyes,” she said. “The hallways were lit, and there were no dank smells.” The apartment was better than anything she’d seen. The big kitchen had “actual appliances” and the living room was big enough for a dining table. She called her sister.

“She had higher standards,” Ms. Chung said. “So if she said it was the one, it was the one.”

It was a sponsor unit in a co-op building, so the sisters needed to quickly submit a package of information, including six letters of recommendation, in time for the next board meeting. They were so worried during the week-and-a-half wait that they continued their hunt, even finding another nice two-bedroom, farther east on East 71st Street, for $2,900.

So, they were able to find a rental, finally, although they had to increase their budget from $2,100 to $2,900 to find something they liked (but ended up going with one for $2,600).

Now, come on.  Can you honestly compare those apartments to what people are buying?  No one would buy a place like that unless they were planning on gutting & rehabbing it, and they wouldn’t buy a place where the hallways were so ugly and rundown, unless it was a steal.

The way the analysts do their comparisons is totally inaccurate and incomplete.  The biggest problem with their analysis is what they use for rental data.

They simply look in the daily newspaper and find listings for large rental buildings (they do not include rentals through agencies or those in smaller complexes, which would rule out about 95% of all listings in the Back Bay and South End).

The analysts include listings for the entire city, and sometimes, I think, the entire metropolitan area, in their analysis, which skews the rents lower than they actually are, in the downtown area.

There are other problems with the analysis (such as, do they include the tax benefits of owning vs. renting, etc.).  I hope to discuss this more, at length, in the future.

Complete article: For Two Sisters, Real Jobs and a Real Apartment

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