Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, June 26, 1995 TAG: 9506260090
SECTION: BUSINESS PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Which one - the renter or the owner - is better off at the end of 12 years? That's the period of time the average Virginia homeowner occupies a house, according to Chicago Title Co.
That's the problem that Steven A. Lyons agreed to solve for the average person who lives in the Roanoke area, defined as including Bedford, Botetourt, Craig, Franklin, Floyd, Montgomery and Roanoke counties and the cities bounded by them.
Lyons, of Berkeley, Calif., is the author of "HomeBuyer -The Book and Software Home Buying Kit," a 136-page book with Windows software. It is available from Stratosphere Publishing at (800) 646-6456.
His conclusion is that both the renter and the home buyer will lose money over a dozen years - except, of course, that they are buying shelter, which has obvious value. But the buyer will fare better than the renter, Lyons said.
He said taking the home-ownership plunge was easy in 1993. With interest rates at a 20-year low, Lyons pointed out, a buyer could purchase a home with the assurance that a similar window of affordability might not open again for years. That must have been the conclusion of many people nationwide, as witnessed by the boom in housing sales and mortgage lending and refinancing.
Now interest rates are again approaching 1993 levels, but Lyons said the bargain rates have not set off a similar home-buying frenzy. He speculated that people are concerned about the continued housing slump in many parts of the nation. As appreciation of housing limps along at less than 3 percent nationally, he said, people are asking whether buying a home is really worth the investment.
Tax write-offs make home ownership less costly than it would appear initially. But Lyons said potential buyers must also take into account many other factors, including: the costs of closing a purchase deal, current rent payments, rental inflation, home-loan interest rates, realty agent's commission, savings account interest rates, maintenance costs, property taxes and insurance costs.
Such detailed analysis of the many factors going into the decision of buying vs. renting is best left to a computer, Lyons said. He applied his software to the average situation for families in the Roanoke area, making some assumptions about local costs.
He assumed the renter's monthly rent is $411, the median rent in Roanoke according to the U.S. Census Bureau. According to the U.S. Bureau of Labor Statistics, the rent should increase 2.5 percent each year, yielding total rent expenditures of $68,040 over the dozen years of his test.
Lyons further assumed the renter put the $15,000 nest egg in a bank and will leave it there for the entire dozen years, during which time it earns 4 percent interest annually. Total earnings on the savings would be $5,506.
HomeBuyer calculated that the renter's total loss after 12 years, considering all the rent payments and all the interest earned on the $15,000 in the bank, is about $62,533.
The homeowner, on the other hand, is assumed to invest his $15,000 toward the down payment on a home costing $89,000, which is the median price in the Roanoke area, according to the National Association of Realtors.
The homeowner will spend the next 12 years making monthly payments of about $545 on a fixed-rate loan, assuming terms of 7.5 percent, the current rate. In addition, the homeowner pays property taxes, maintenance costs and property insurance premiums, but writes off the property taxes and interest payments.
The National Association of Realtors said the annual increase in housing prices in the Roanoke area since 1988 has been about 3.3 percent. To be safe, Lyons estimated appreciation conservatively at 3 percent annually over the next 12 years, meaning after the dozen years, the $89,000 home would increase in value to nearly $127,000.
When he sells, the homeowner's net loss, after considering all the expenses while owning as well as the savings on income taxes, is about $42,935. This assumes the homeowner will buy another house within two years before or after selling, thus postponing paying tax on the capital gain.
All this means the homeowner also lost money, Lyons said, but he lost $19,598 less than the renter. Owning a home becomes the more profitable course after six years have passed.
Another possibility is that a self-disciplined renter had deposited in the bank the money he or she would have spent on buying a house. The HomeBuyer found the renter would need to earn an interest rate greater than 9.7 percent annually, a rate that is hard to come by these days, in order to make this option equal the net profit from home-owning.
``So even with wimpy appreciation of 3 percent, the average family in the Roanoke area is still better off owning than renting,'' Lyons said.
If Roanoke's housing prices stopped increasing in the future - as it has in some parts of the nation - then renting might look more appealing, Lyons said.
But remember that his figures were based on local averages and might not cover every person's particular situation.
by CNB