When To Buy A House - A Worst-Case Scenario Analysis

When To Buy A House - A Worst-Case Scenario AnalysisYou are in luck if you are wondering when to buy a house in this crazy real estate market. I have created a simple case study to help you make your home buying decision confidently.

Home prices are soaring. Rents are soaring. Inflation is running high. People are talking about a housing crash. Others are calling for a housing bubble. Real estate agents are still saying, "now is the time to buy!" There's a lot of chatter about the real estate market today, so what do you do?

Today's case study is not meant for investors, rather it is for people who need to move. Perhaps a new job has taken you to a new market area, or maybe your family has outgrown your current living space. Whatever the reason, you must decide between renting and buying, so I've used a logical process that will help you know when to rent a house versus when to buy a house.

Case Study: When To Buy A House

Having sold homes in Tallahassee for more than 30 years, I have found that there are two types of consumers that I serve. Those that must move and those that want to move.

People Who Must Move - People who are in a position where they must find a new home, for whatever reason, have two choices: Buy or rent.

People who want to MovePeople who are in a position where they want to find a new home, for whatever reason, have three choices: Buy, rent, or stay where they are.

Instead of coming up with a generic analysis of deciding between buying or renting a home, I have used the absolute worst time to face this decision in the past eighty years. What if you had to make a move in the middle of 2006, right before the housing market crashed?

I have gathered a lot of data to develop a picture that clearly shows how one should approach this decision. Here is what I have assembled:

  • Median Sales Price of Houses Sold For The US - This dataset allowed me to identify a purchase price at the median home price in 2006 when the housing market had peaked (with hindsight, the absolute worst time in recent history to buy a home).
  • US National Home Price Index - This data allowed me to calculate the changes in the value of the home purchased each year from 2006 to our current date in August of 2022.
  • US CPI For Rent Of Primary ResidencesThis data allowed me to calculate the annual changes in the monthly rent of the home leased from 2006 to our current date in August of 2022.
  • Historical Mortgage Interest Rate At Decision-Making Time - I used the mortgage interest rate from June 2006 to calculate the mortgage payment (Principal & Interest).
  • Ownership Costs - I have included property taxes and insurance (PITI) as well as a maintenance expense so that the total money spent during ownership is accurate.
  • One Final Note - I used the median home price in 2006 to calculate the ownership route, and I have used the P&I portion of the mortgage payment as the starting point for rent. In my experience, this would mean a lesser house when renting. Typically, a landlord leases a property for more than the total cost of ownership. Still, I wanted a conservative analysis that would keep readers confident that I was not pushing for a "now is the time to buy" result.

All of this information was gathered in order to create the graph below.

Case Study: Market timing in real estate - When to buy a house

This graph calculates the "cash position" for each decision one can make. The blue area reflects the cash position for buyers, while the red area calculates the same for tenants.

Each measurement includes all the costs of renting or owning.

When To Buy A House - The Breakeven Point

The breakeven point in our case study is the date at which both a buyer and a tenant will have expended the same amount of money.

When was the breakeven date between renting versus buying at the peak of the housing market in 2006

About three-quarters of the way through the fourth year, a tenant will have spent the same amount in rent as an owner would have paid for a down payment, closing costs, interest on the loan, insurance, property maintenance, and appreciation or depreciation.

Remember, we are using the worst time in recent history to purchase a home for our decision date, so the buyer, in this case, lost more than $13K to depreciation in the first year. The tenant merely "lost" the rent paid each month with no risk from depreciation but was subject to rising rents (calculated with the annual rental rate changes data).

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Equity Forms When Buying A House

One of the primary motivations for homeownership has been the positive growth rate for real estate appreciation which has averaged 5.2% annually for the past eighty years.

How long did it take for house buyers to have equity?

Historically, property owners are equity-positive in their third year of home ownership, but our case study starts with the worst historical time to buy a house. For somebody who purchased a home in 2006, it took nearly ten years for their equity position to be favorable.

On the other hand, the tenant is out more than $250K in rent over that same period. So if you are pondering whether to buy a house today, it is not merely the cost of the house versus living for free that you should consider. Unfortunately, many commenters on my YouTube channel seem to believe there is no cost unless one buys a home. Therefore, the cost of renting must be in the analysis, and rents today are rising faster than any time I've seen during my career.

Should You Rent Or Buy A House Today?

Our final view of this graph reveals a decision-making tool for determining when to buy a house.

Case Study reveals how to decide between renting or buying a house

This graph shows that if one could go back in time to 2006 and face a decision on whether to buy or rent, the answer would be determined by the length of stay in the home.

Again, this was the worst time to buy a home in eighty years, but people who stayed in their homes longer than three years and nine months spent less money than those who chose to rent. Even those that sold after five years of ownership who had to bring money to closing when they sold, yet the cash required (combined with everything else they spent) was less than they would have paid in rent.

Knowing When To Buy A House

Many talking heads on YouTube claim that today's housing market has peaked and that home prices will fall. However, most of these same people say you should wait to buy a home. Where do they live for free? In their parent's basement?

They do not seem to realize that not everybody can wait to make a 'buy versus rent' decision right now. Some people have things going on in their lives, and they need to move!

As far as I’m concerned, anybody leasing a home right now faces this question every time their lease is up for renewal. Should you buy a house or rent? With year-over-year rents rising at double-digit rates for the past twelve months, renters need to embrace this issue and determine their best course of action.

If you fear a near-future decline in home prices, ask yourself, "how long will I stay in the house?" If the answer is less than three years, you should take the conservative approach and enter into a lease. But if you intend to stay beyond four years, then the decision is simple, you should buy a house.

Rents today are soaring, so I believe that this type of analysis conducted in the future will show a much earlier breakeven point than the one we have done today. Nevertheless, I have found that most people prefer the conservative approach when dealing with the most significant expenditure in their monthly budget.

If you know somebody pondering the question of "when to buy a house," please share today's article with them, it might make their decision easier.

There are a lot of people who endorse Joe for the job of selling your home, from Barbara Corcoran (Star of ABC's Shark Tank) to Preston Scott (host of Tallahassee's top daily "Audio Magazine," as well as the thousands of happy customers Joe has helped in the past. Listen why!

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