|Rent Vs. Buy Comparisons In The Age Of Inflation
$500,000 HOME APPRECIATES $200,000 IN 9 MONTHS
My wife Heejin bought a house in Plano, TX, in November for $519,000.
We put down 20%, and our PITI is $2,725.
The house was rented for $3,700 per month when we bought it, so we could have cash flowed nicely from the start.
The tenants moved out though and we swept the porch, mowed the lawn, and changed a few light bulbs – and now the house is worth over $700,000.
(We actually did a few more improvements 😊, but I never want to imply that we were particularly shrewd when we were also just very lucky; show me someone who confuses “lucky investing” with “shrewd investing,” and I will show you somebody who will be broke in five years.)
MARKET RENT SHOOTS UP 22% TOO
ANYWAY – here is the most telling point for purposes of this blog: the house could now easily rent for $4,500 or more (a neighbor is advertising $6,000); a 22% increase from November.
I have blogged about sharing Freddie Mac’s Excellent “Rent vs. Buy” Calculator many times.
But, I have not done so recently b/c home prices have increased so much; it did not always yield particularly compelling results… UNTIL NOW!
What has changed is the threat of inflation over the long haul.
Yes, many market watchers think we might see deflation in the near term but almost every pundit thinks inflation will kick in within a year or two and remain prevalent for many more years.
One example is Johns Hopkins Economist, Steve Hanke; he is a renowned inflation expert and, at age 78, he has been around the block so many times he has worn grooves in the sidewalk.
Here is an excellent interview with Mr. Hanke in which he explains inflation and predicts inflation levels of “6 to 9%” this year alone, with higher levels to come!
The reason is the massive increase in our money supply, as it grew three times faster than it should have, per Mr. Hanke.
OK – back to the Plano home.
When I do a rent vs. buy comparison with Freddie’s comparison tool (linked above) – based on a $700,000 price with 20% down, a $4,500 rental rate, a 6% inflation rate, and only a 3% home appreciation rate (super modest in an inflationary environment), the analysis shows that buyers will be over $300,000 better off than renters in 7 years!
ALL of my assumptions were very conservative though. The numbers can be realistically tweaked (5% home appreciation; 9% inflation) to show buyers ending up over to $450,000 better off in 7 years.
JUST COMPARING PITI TO RENT
Here are some simpler numbers though.
If someone bought our Plano house today for $700,000 and put down 20%, PITI (total housing payment) would be under $3,900, or $600 less than the market rent.
In 7 years, PITI will still be about the same but the market rent, with 6% inflation, will be almost $7,000 per month.
So, put that in your pipe or smoke it! (or just buy a house)
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