July 17, 2010

Ginnie Mae buy versus rent calculator

From an anonymous Burbed reader:

I thought that this might be a fun tidbit for burbed, though it’s not Bay Area-specific.

Ginnie Mae kindly provides a "Buying vs Renting" calculator to help prospective purchasers determine whether buying or renting is a financially better decision.

http://www.ginniemae.gov/rent_vs_buy/rent_vs_buy_calc.asp?section=YPTH

I did think that it was kind of interesting that it defaulted to 10% down rather than the more-traditionally-recommended 20%, but that wasn’t what I was writing about.  While the calculator does provide a "Yearly Home Value Increase Rate", entering a negative value unfortunately returns the error "The value you entered must be a positive number."

It seems that Fannie Mae’s assumptions just haven’t held up all that well…

What it really is missing is a checkbox that says “Real Bay Area?” – ‘cuz if that checkbox is checked, it should automatically default to “BUY BUY BUY”.

Be sure to use this before you head out to your 15 open houses today! Thanks anonymous burbed reader!

Comments (1) -- Posted by: burbed @ 5:28 am

One Response to “Ginnie Mae buy versus rent calculator”

  1. SEA Says:

    Using the default settings, and we all know things will fall apart if the owner defaults, things look great, if you want to believe the calculator.

    $750 Monthly Rent
    $150,000 Purchase price
    NOTE: Monthly rent is 0.5% of purchase price.
    $15,000 Down Payment [=10%]
    30 year loan
    7.5% cost of capital on principal balance
    NOTE: Cost of capital on book value (down payment plus principal paid, etc.) is missing [=ZERO PERCENT].
    10 years to stay
    1% property tax rate [=$1,500 per year=2 months rent]
    2% housing price appreciation

    End result = “Buy is cheaper by $34,063.” Yup, that’s right down to the last dollar. Not just about $34k, but rather $34,063. I’m wondering if we can obtain a little more precision?

    In any event, I didn’t see any Drano and light bulb cost, but there is this disclosure:

    “Note: The calculator above uses these items in its calculations: private mortgage insurance, homeowner’s insurance cost, loan closing cost, cost of selling a home, property tax, homeowner’s tax saving, and rent increases. Calculator results are estimates only.”

    But that’s not the bigger issue. What’s the bigger issue? First of all the cost of capital on the down payment, and so on. But it gets worse.

    That $34k in “savings” is realized in 10 years. One must pay, pay, pay for 10 years and then hope to realize the $34k. Where is this discounted to present value?

    Put differently, when you are paying 7.5%, yet realizing 2% in a return, that’s called negative leverage.

    Maybe you would like to take a look at the annual rent versus the cost of capital. Since we are paying 7.5% but the home is going up by 2%, then the net cost of capital is 5.5%. Yes, yes, net cost of capital includes any tax benefits, etc. How much does the rent cost? It’s 1/2 of 1 percent per month, so the rent is 6% annual cost.

    Is it any surprise when you assume a rental cost of 6% but a buy cost of 5.5% that it’s cheaper to buy?


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