David Leonhardt devoted his column today to an analysis of the relative merits of owning versus renting. It is useful question to raise, since many policy types have pushed homeownership in situations where it was virtually certain to lead to bad outcomes. (Did anyone lose their job for getting moderate income families to buy homes at the peak of the bubble, 20042007?)
While this is the right question, Leonhardt's math is off. He assumes a 20 to 1 price to rent ratio leaves a rough balance between owning and renting. In fact, the ratio would be closer to 15 to 1, it's longterm average.
The arithmetic is straightforward. The average real interest rate on mortgages is somewhat over 4.0 percent. Property taxes average 1.0 percent, as do the combination of maintenance costs and insurance. This brings average real annual costs to 6.0 percent of the sale price. Then there are turnover costs (realtor fees and various closing costs) that average roughly 10 percent of the sale price on a roundtrip basis. The median period of homeownership is 7 years, which gives a cost of 1.4 percent a year, raising the total to 7.4 percent.
Even if the mortgage tax deduction knocks this down by a percentage point, this still leaves annual costs at 6.4 percent of sale price  much closer to 15 to 1 ratio than Leonhardt's 20 to 1 ratio. (A full percentage point tax benefit would be very high  the actual tax benefit will be based on the difference between tax deductions including mortgage interest and the standard deduction. This will in the vast majority of cases be far less than the full mortgage interest deduction, since the overwhelming majority of homeowners would take the standard deduction if they were not owners.)
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In Mr. Leonhardt’s example, the rental rate for a 4BR house seems on the high side. I live in the DC area, and our rent for a 4BR/2BA house in 2008 was in the low $2,000 range.