To buy or to rent? It’s a question almost all adults ask themselves sooner or later. But that one question begets many others, which often lack straightforward answers themselves. Pretty soon, what started as a simple yes-or-no query looks like a confusing fractal chart of concerns and considerations, leading to no clear answer. Which is frustrating, because the decision to purchase a home is one of the most important a person will make. Some certainty would be nice.
Context matters, of course. If you’re at or above a certain tax bracket and can buy a house outright, or make a large down payment and take out a small loan, then the longterm benefits of home-owning are evident. With every quarterly market report, Brooklyn real estate looks like not only a safe longterm investment, but even a shrewd one. Demand still far outpaces supply, a pattern that looks unlikely to change soon (and which speculative investors have noticed). According to a sales market report released this week by the realty group Douglas Elliman, in the first quarter of 2014, listing inventory declined to a six-year low in Brooklyn, while median sales prices for the first quarter rose to a six-year high. In addition, luxury sales were the highest on record. The average home in Brooklyn now costs $681,182. The report concluded that only a “chronic lack of inventory kept the number of sales from expanding” even greater.
Who’s doing all this buying? A recent report from Ideal Properties Group paints a picture. Titled “Profile of Home Owners in Brownstone Brooklyn,” the 19-page document amalgamates local demographics for buyers in Park Slope, Brooklyn Heights, Carroll Gardens, Cobble Hill, Prospect Heights, Fort Greene, and Williamsburg—“brownstone Brooklyn,” basically—to come up with the “average” purchaser: a 31 to 40-year-old male who is a member of a two-person household, has more than $200,000 available in liquid funds, works in accounting, finance, sales, law, or marketing, did not take out a loan, and already owns property but is looking to upgrade. Buyers with annual incomes below $75,000 accounted for 3% of all buyers in the first quarter of this year, a whopping 81% decline from the same period last year.
Not that the rental market looks much better. Median rental prices are up more than 13% in north/northwest Brooklyn—a record annual increase.
Looking at all the data, you can fool yourself into thinking that the decision to buy or rent is purely a complex financial calculation. On some level, it is ineluctably just that. But the numbers can obscure more powerful, intangible motivators. “It’s often done from a more personal or emotional level,” says Stephanie O’Brien, a real estate agent with Douglas Elliman. The best piece of advice for most would-be homeowners is to make a decision based primarily on where you’re at in life: Is your job secure? Do you want to settle down? Start a family?
If there’s a decent chance that you will be moving again in the next few years—let’s say you’re at the outset of a new career, or you’re moving to Brooklyn for the first time and you’re unsure which neighborhoods are right for you, or you just value mobility—then renting is the clear way to go.
Conversely, if you are pretty sure that you are ready to settle in the same place for at least five years, buying makes cautious sense. According to O’Brien, “in prime areas, based on properties being purchased at market price, it currently takes approximately 3 to 5 years to see a lucrative return. Fringe or up-and-coming areas take approximately 5 to 7 years.”
A common mistake some homeowners make is comparing a month’s rent to a month’s mortgage payment. Doing so overlooks additional fees associated with home-owning, including property taxes, interest, homeowner’s and property insurance, maintenance, and Homeowners Association fees. HOA fees are monthly, non-negotiable fees paid by an owner of a property that is part of a larger development. They can cover everything from maintenance and amenities to utilities; rates are dependent on the quantity and quality of services, but can go above $1,000 per month.
One helpful metric that takes all this into account is called the rent ratio. Rent ratio is the sale price of a house divided by the annual cost of renting an equivalent house. The general rule of thumb is that if the ratio is below 15, buying is the smarter financial decision. Above 20, and the monthly mortgage bill is higher than rent for a similar house. Price-to-rent data isn’t widely available, though, and no realtors I talked to tracked this number, but a rough estimate for Brooklyn is somewhere between 20 and 25. (In 2011, the New York Times published a chart that indicated the ratio for all of New York City was 15.)
That means renting is obviously cheaper in the long run, right? Not necessarily. Right now in Brooklyn, a confluence of factors have created the “perfect storm” for buyers, says Sarah Burke, the Executive Vice President and Director of Sales for Douglas Elliman. (Here’s your reminder to take anything a realtor says with a grain of salt—they have a big financial stake in convincing you that now is always the time to buy). Monthly rents are higher than they have ever been and are increasing at a pace far quicker than sales prices, which will pull the rent ratio down even if nothing happens to home prices. Interest rates remain low following the crash of 2009-10, and Burke doesn’t think they “are going to rise dramatically in the next year.”
Burke also thinks the market has “just about fully recovered” from the housing bubble, and that the current helium market won’t similarly burst. “Back in 2007, you could fog a mirror and get a loan—that’s very different now. Banks are much more scrutinizing.” As a result, “people are putting a lot more initial equity into their homes, which protects from another bubble.” Owning brings with it privileges that are hard to put a price on, as well. Owning a home confers status and security in a way that renting never can.
Though the New York City homeowners market has generally been boom or bust since 2007, the most recent edition of the State of the City’s Housing report, issued by NYU’s Furman Center for Real Estate and Urban Policy in 2012, concludes that “encouraging signs of recovery—sustained employment growth, rising housing starts, increased numbers of home sales, and generally increased sales prices—provide reason to believe that the nation and New York City have turned the corner.”
The decision to rent or buy stems from an emotional place–after all, home ownership is one of the country’s clearest signifiers of status and security/adulthood and financial development (take your pick). But it’s one of the most consequential decisions a person can make, and in a place like New York, where the financial stakes are so high, there’s less room for emotion.