Always a popular comparison in real estate: Is it better to rent or buy?
Now, real estate website Trulia.com has launched a Rent vs. Buy Index
, featuring the top 10 cities in each category. Some of the results were quite surprising.
Namely, that Omaha, home to famously frugal financier Warren Buffett, pictured left, comes in at no. 2 -- right after no. 1, New York City -- as a city where it's cheaper to rent than buy. Also on the list: Oklahoma City at no. 6 and Kansas City at no. 7. The results apparently also came as a surprise to Trulia's number crunchers.
Ken Shuman, spokesman at Trulia.com, told HousingWatch, "In Omaha, prices have always been steady and on the rise," but also managed to avoid the crash. Shuman points out that the "Buffett effect" makes for a fairly resilient economy there. Plus, Omaha and Kansas City never saw the glut of supply that flooded condo markets in Florida and Arizona.
On the flip side, the "cheaper to buy" list also yielded a few surprises, with Minneapolis and Arlington, Texas making it to the no.1 and no. 2 spots respectively.
The obvious candidates -- Miami, Phoenix and Las Vegas -- also made it to the list, albeit a little lower.
Shuman points out that Minneapolis never saw the huge spike in prices during the boom, which means that once prices started dropping, ownership became really cheap. Minneapolis is also one of the states hardest hit by the crash -- with one in every 712 homes facing foreclosure
, according to RealtyTrac -- which means that there are many former homeowners looking for rentals and pushing up rents in the process.
The problem is, most calculators simply look at the monthly cost of renting versus buying -- adding mortgage and interest, then comparing it with rent -- without taking into account the wider financial implications.
Trulia doesn't claim to do things any differently. Its number crunchers calculated the index by looking at the total rental and purchase costs of two-bedroom apartments, condos and townhouses in 50 cities. Its homeownership cost includes mortgage principal and interest, property taxes, insurance, closing costs and HOA fees. Rental costs include rent and renter's insurance.
If you're serious about this equation, however, it makes more sense to look at a range of other factors.
Most salient, is opportunity cost. Think of all the money you're spending on interest. Could you make a higher return investing it in other assets? It's a tricky question but consider this: Home prices historically gain just 1 to 2 percentage points over inflation according to the National Association of Realtors, while the S&P stock index, after inflation, has almost doubled over the past 50 years
, according to data from Yale economist Robert Shiller. So even though you get a big tax deduction in interest payments, your return doesn't come close to what you could make in the stock market.
It's near heresy to suggest that we should all be renting instead of owning. Just some food for thought as you peruse Trulia's list and consider scooping up a townhouse in breezy Minneapolis.