Rent or Buy in Chicago?

Everyone seems to be buying in Chicago. It’s THE thing to do. The New York Times released one of the coolest web apps ever called “Is It Better to Rent or Buy?” Just plug in your numbers and POW, it tells you if it’s better to rent or buy.

And boy, do I ever learn the critical importance of Annual home price appreciation. Here’s the graph with a 5% increase.

Oh wow. 11 years, it’s better to buy. Sounds great, right?

Well, let’s take a look at a 3% annual home price appreciation:

OUCH! It’s better to rent, like, forever!

Now how did I get that 4% number for the rate of increase for renting. From 1988-1997 Chicago’s rent increase was 4.0%. But that’s ten years ago. The average rent nationwide was 2.5% in 2005. (And in 2004 the apartment vacancy rate was 10.4%, the highest level since the Census Bureau began keeping statistics in 1956.) Ok, so putting down 4% for apartment rate increase should be a very liberal amount that favors buying.

Back to annual home price appreciation, buying a house or condo REALLY depends on this annual home price appreciation. What’s the history of this trend? Read below the fold to see more graphs.
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Courtesy of Marin Real Estate Bubble blog and National Association of Realtors. Here are some graphs with National trends.

Momma. Look at that dip.

And it looks even WORSE for condos!

Now it makes me wonder if the market will rebound, look at all those years when the appreciation was really high. I all need is a 5%.

But then this graph freaks me out:

People are just overspending what they can afford. I’m convinced that too much of America is in debt, like, serious debt.

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unlikelymoose
13 years ago

I don’t know much about real estate. But it looks like the housing market bubble has burst. Now, I’d guess some places are still trying to get top dollar for their townhomes/condos/houses. You don’t want to pay top dollar for a place just as the bubble is bursting. It might be smart to wait for all industry reports to say that housing is clearly on the decline. So wait until it’s a 100% buyers market. In fact, it’s probably best to wait until everyone is saying that the sky is falling on the real estate market. Then you’ll get great value. You’ll be able to buy a quality place for bottom dollar. You’re in an ideal situation because you don’t have a place to sell. If you had a place to sell, then you’d be worrying that you wouldn’t get much value for the property you’re selling.

Andre Alforque
13 years ago

There is no general rule for this. It depends on where you are in your life, and what you plan to do. If you want to be buying towards a mansion to retire in, you best start buying now. But, if you plan on moving around the country and not settling down, you best stay a renter. And yes, just like any other investment (like playing the market), there are risks. Why worry about your financial future? Hire a CPA to give you options, and choose the option that fits you the best.

Andre Alforque
13 years ago

Well, picking a CPA is like picking therapist — you have to try them out until you find the one you like. For someone like you that wants more interaction, you may have to spend a little more effort and money in a CPA. Yes, most CPA’s throw out numbers; but there are interactive ones as well. You hire them to give you advice about investments; your level of involvement is up to you. Choose the personality that best fits your needs. Yes, you can do this all yourself. But if you’re looking into buying property, you are going to have stresses beyond your imagination. Best to minimize this by having your finances in order.

Lisa Schryver
Lisa Schryver
13 years ago

These graphs are useful to a point, however, it doesn’t take into account where you live. Chicago’s home appreciation is quite good, unless of course you live in Englewood or some other neighborhood that no one wants to live in. Also, it depends on your home itself. If it has what everyone wants (typically, good sized kitchen w/ nice appliances, nice baths, outdoor space and parking) then you’ll have no problem gaining a nice return on your property in a few years. I’ve emailed Jason about this, so he might be leaving a comment with all the industry jargon, etc.

Lisa Schryver
Lisa Schryver
13 years ago

Oh, and renting is like throwing money out the window. When you own, you’re at least earning equity, which is always better in the long run.

Lisa Schryver
Lisa Schryver
13 years ago

Here’s what the financial genius had to say: eh, yes and no. I haven’t had time to really dig into it, but it appears that this could be correct assuming an interest-only mortgage. If you are actually amortizing there are a few other issues to take into account. 1. Equity payments – They start off small (maybe you are paying back $100 a month for the first few years) but by year 15 on a 250k mortgage you are close to 50/50 interest and principal in your payments. This seems fair since the horizion on the analysis was 11-30 years. There doesn’t appear to be any benefit baked in for this. 2. Tax Breaks from Interest & Property Taxes – Should probably be factored in (probably as an increase to the rent escalation rate under an opportunity cost concept). So without going too in depth it looks like this is strictly based on home appreciation verses rent escalation. I’m not totally sure though

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