how do u make a decision between renting and buying a house

QuoteOriginally posted by: yoshimura1how do u make a decision between renting and buying a housesell!

Much of what I have heard on bubbles in housing is that any "burst" is probably going to have less to do with falling prices than with several years of slowdown, low volume, and letting homeowners lose time value.The simplest way to make the buy-rent decision is quite similar to how you make the buy-or-no-buy decision whenever you see a bond; if the observed yield is better than it should be given your view on the value of the principal, you buy, else you don't buy. For example, do you buy 10y TIPS or the plain old 10y? If you think inflation will be higher than the spread between the current yields, you buy the TIPS, else you buy the 10y. Do you buy the govie yielding 5% or the GM bond yielding 12%? If you think GM won't default (or that spreads won't widen by the time you sell), buy the GM, else buy the govie. Same in the housing market: my annual rent is just under 3% of the salable value of my flat, then factor in property taxes / maintenance / free water & nat gas for me / insurance / PV of rent stabilization, etc., the landord is betting that the place will continue appreciating in value enough to make up for all the current costs and foregone interest. If I were my landlord, I'd sell this place, put the money in the bank, and wait for rental yields in manhattan to fall back around or above yields I could get on risk-free bonds, because I don't think praying for that kind of appreciation at these low rental yield levels is a good risk.

In some countries in Europe, this is boom-time for landlords because most young people cannot afford to buy a house, even if the parents are doing the collateral bit. Try buying a house in Dublin for less than Euro 400,000!

QuoteOriginally posted by: exotiqMuch of what I have heard on bubbles in housing is that any "burst" is probably going to have less to do with falling prices than with several years of slowdown, low volume, and letting homeowners lose time value. I agree. I think it will be more of a "ffffppphht" sound than a "kablooie."Quote...If I were my landlord, I'd sell this place, put the money in the bank, and wait for...above yields I could get on risk-free bonds...This is the essence of why the hedge fund thing is the cat's pyjamas. If you get your hands on some real capital, it becomes obvious very quickly that there's not much you can do with it that:1) will make money2) doesn't correlate 100% to the SPX

Present value of transaction costs: Do you want to stay?

Firstly you can look at a sale and leaseback type argument, working out the NPV of future rent and mortgage payments etc. (Remember not to use LIBOR for your NPV, using the high street savings rates for your yield curve - this is for you the individual!)However, the big problem with housing is that it is probably the single largest completely imperfect market. Almost no too houses (goods) are the same, and information is severely limited. On top of that to buy and then sell a house is likely to cost you at least £10k on agents, solicitors, stamp duty, removal etc etc. So it is had huge amounts of friction. But worst of all houses do not trade together, and while the "average" value of a house may increase, your house could go through the floor.Taking all those into account you should expect a massive risk premium on a house. However there is one final sting in the tail. Not only is information shockingly poor, but the market is full of people who have no idea what they are doing, trade on whim and emotion, or have completely illogical criteria, on top of which the majority are not in it to make money.So... I think the best thing to do is compare the mortgage payments to the rent, and accept that some advantage of owning (i.e. getting the collateral, and possibility of value increase) cancels with the reduced market risk of renting. If you wish multiply the mortgage payments by 80% or something to compensate a little for getting more money in the long run. Then try to value the house yourself. What is it worth to you? Is it near a school you like for your kids, nice decor, nice pub, good size, garden etc etcIf you do want to look at it as an investment though, then a simple thing to do is work out the price increase you need in order to cover the moving costs in the time period you intend to stay there. Then ask if you think thats reasonable.

QuoteOriginally posted by: MikeCroweon top of which the majority are not in it to make money.Really? Could have fooled me.

Mike Crow - I think you are mistaking risk and liquidity.Sure houses are illiquid, but that doesnt mean they are necessarilly less usefull than a hefty bank balance. Arguably shelter and warmth are a necessity for most of us.I just bought a place, but had to sell a lot of shares to get the mortgage down to a reasonable mortgage repayment schedule I felt confortable with.I wouldnt be surprised therefore to see prices flat for a while on the back of the recent equity market correction.

QuoteOriginally posted by: migalleyQuoteOriginally posted by: MikeCroweon top of which the majority are not in it to make money.Really? Could have fooled me.Really? Funnily enough i thought most had a house to keep the rain off...My point being that you have to live somewhere, and "the man on the street" is going to choose his home based on what he values over financial NPV's risks etc

QuoteOriginally posted by: htmlballsupMike Crow - I think you are mistaking risk and liquidity.Sure houses are illiquid, but that doesnt mean they are necessarilly less usefull than a hefty bank balance. Arguably shelter and warmth are a necessity for most of us.I just bought a place, but had to sell a lot of shares to get the mortgage down to a reasonable mortgage repayment schedule I felt confortable with.I wouldnt be surprised therefore to see prices flat for a while on the back of the recent equity market correction.Surely illiquidity makes it riskier than liquidity?Remember you can't apply CAPM here because you can only own 1 house. No diversification. And since houses are subject to LOTS of ideosyncratic risk (roof damage, dry rot, fashion, DIY, neighbourhood) your "expected" return should be higher.I never suggested (or never meant to) that houses are less useful than a bank balance. Simply that if you look at your IRR in terms of money alone, you will need a large risk premium (I am not trying to suggest that premium is not there - it probably is the rate house prices go up). But if you include your happiness and security in your utility function then that will compensate for some of that. I know I don't like having a landlord, simply because of the hastle and the restrictions on what you can do (decorate etc), but financially you wouldn't include that hastle.

I just went through all this recently when buying. First of all, while the real estate market is 'slowing' in general in the US (whatever that means anyway), you can still find local fluctuations where you can buy low and sell high(er). Look at satellite towns to major metros (eg., NoVA). Buy in the fall/winter over the spring/summer when more than likely you'll compete with more buyers, and go for the tattered house in the good neighborhood. All common sense stuff that I hope like heck pays off