Recently, we reviewed the New York Times' remarkably well-designed online tool that can help its users decide whether they should rent or buy their next place to live. The tool's main strength is its user interface, which allows the user to individualize a wide range of information to tailor the tool's output for their specific circumstances.
We didn't think about it at the time, but the tool's elaborate interface might also be a weakness.
It's not what you think. The tool's interface is very well designed and it will produce very high quality output. The problem is more one that affects the user: To get the full benefit of making a buy-vs-rent decision using the New York Times' tool, you have to take full advantage of the full range of the data that it has been designed to consider.
That information can take quite some time to gather, which means that the user would only get the benefit of being able to get the tool's high quality feedback after they've done quite a bit of research while shopping for a place to live.
What if you as a user wanted to get feedback for making a decision on whether to rent or to buy while you're still early in the process of shopping for a place to live? Before you've narrowed your choices enough to where finding out all the things like property tax amounts, closing costs, appreciation rates and all the other things that might impact your decision based on feedback from using the New York Times' tool?
Now, that's where our kind of simple, home-built tools come into play! Our tool below is based on the Rule of 300, which we learned about from Econlog's Arnold Kling, his discussion excerpted below:
An even simpler rule that I use is the rule of 300. If the price is less than 300 times the monthly rent on an equivalent house, it is ok to buy. I figure that if the real interest rate (i.e., the after-tax interest rate minus the inflation rate) is 4 percent, then the ratio of price to annual rent should be 1/.04 = 25, which means that the ratio of price to monthly rent should be 300. In the example, they give, the ratio of price to monthly rent is well below 300, so my simple rule says "buy."
Ready to run your numbers? Set. Go!
So, there you go! A simple tool that can help you whittle down whether you should look at renting or buying a place to live. Do be aware though that the simple math behind this tool does have its weak points, as Arnold Kling notes:
The real killer, relative to my formulas, is the transactions costs. I think that an unheralded part of the housing boom of the past decade has been a reduction in transaction costs, as the costs of mortgage origination have fallen. Real estate commissions still wipe out a lot of the profit from buying a home, though, which is why it usually only pays to own a home if you plan to keep it a long time.
In any case, once you are getting nearer signing a lease or a purchase contract for your next place to live, the New York Times' tool will help you take these things into account as you fine tune your choice between the two options.
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