Well, folks… it is Story Hour. And Daddy James (I am writing this on Father’s Day, after all), is going to deliver an impassioned “Reading.”
There are certain things that keep me awake at night. (No, not those sorts of things. Not any more, anyway.) One of them is real estate valuation, and delivering the best information I can to my clients and to all of you.
It goes without saying that we have had a great run of real estate prices since the market hit a trough in mid-2011. As I have written before, prices in most neighborhoods have doubled. In some locales (such as where I live), they have tripled.
Now, what does all that have to do with the topic of today’s Reading?
Well, often you hear members of my profession (and I think, at our best, it is a profession) discuss how it is much better to buy a home than to rent. Typically they will cite information from the National Association of Realtors in support of this assertion.
My question – and one I will be considering in more depth in the next few weeks – is whether that is always true, across all geographies, and all property types.
My focus since I entered the profession has been single family homes in select neighborhoods. I will concentrate my research there. But for now, let me make some general observations – really hypotheses that my initial work seem to bear out.
First, as I have said here many times before, all real estate valuation is hyper-local. Certainly presentations from NAR that may be applicable in Missouri, may not be relevant to the Florida market. Even more discretely, observations for central Florida or the Panhandle may not work here in the southeastern part of the state.
Second, recent changes in the tax law (remember that big tax cut that just passed?) may well make assertions about the preference of purchase less valid. (I must say that even though I have an MBA and was also once awarded a Chartered Financial Consultant designation, I am not a tax accountant, and strongly advise people to consult an accountant for assessment of their personal situations.) With changes in the standard deduction and limitations on certain popular deductions, previous rules of thumb may not work for everybody.
The most important thing has to do with where in the pricing cycle we find ourselves. Typically the buy-versus-lease assessments I have seen assume that real estate is fairly valued and that prices will increase at some constant amount over a certain time frame. Now, I get in trouble with many people when I suggest that certain types of properties in certain areas may be overvalued. But as many remember, over-valuation has happened in our market before, and not that long ago. In a highly leveraged transaction (which would describe most real estate purchases where a buyer borrows more money than they use as a down payment), any significant reduction in valuation could make you upside down (and not in the good way).
Still, my hypothesis remains that, in certain circumstances, for most people, buying is a better bet than leasing. I believe this statement is most likely true over the intermediate and long term… but probably not in the short run. However, there are things you can do to tip the odds more in your favor.
More on this topic in a future column.by