An article in this week’s Crain’s cites anecdotal evidence of an incipient shift from rental to ownership, suggesting:
… that a confluence of factors — from low interest rates to escalating rents — are starting to push would-be buyers off the fence. The anecdotes don’t mean the market has tipped from apartments, the favored choice for downtown dwellers in the post-crash years. But the first faint glimmers of a shift may be in sight.
A favorable cost of ownership is one of the factors contributing to a purchase decision. According to Crain’s, a qualifying buyer able to put down 10 percent for the 1,048 square foot Unit 1919 at 235 Van Buren could save $289 a month by purchasing the unit for $279,900 rather than renting it at $2,249. The monthly ownership cost estimate assumes the buyer finances with one of the building’s preferred lenders which will pay for mortgage insurance.
235 Van Buren still has units available through its rent-to-own program, enabling fence-sitters or buyers who need time to complete their down payment or repair their credit to lock in the purchase price of a unit and rent in the interim.
According to Vik Wadhwa of Urban Living Chicago, one of whose clients was featured in the Crain’s article:
We are starting to see that increasing rents in the downtown market are influencing some would be renters to decide to purchase. Rising rents, low inventory of available apartments, low interest rates, and low condo prices are all contributing to this shift from renting to buying. We are advising clients to buy only if they have at least a 3-5 year time horizon.
Pricing appears to have bottomed in certain pockets of downtown that are popular with young professionals such as Mr Kumar, who we helped purchase a new 1 bedroom condo with parking and great view for $249,000 at Silver Tower.
NOTE: 235 Van Buren and Urban Living Chicago are both clients of ours.
If it is, it won’t last long. The available inventory is at record lows (and falling) at the moment so adding to the buyer pool will drive prices back up. This may not be the case for developers trying to sell out new inventory, but it should be true for resellers. Other than 235 VBF, are there any new condos left within a mile of the Sears Tower?
This article also fails to mention that holding costs (taxes, assessments, maintenance) only go up over time. So while you might save $75/mo the first year, you are probably even in year two and behind in year 3. That doesn’t even include the ~6% in fees/taxes you have will have to pay to sell the place.
Fred,
The spread is $289 a month – not $75.
Are you seriously suggesting that the cost of ownership goes up but rent doesn’t?
The $75 came from the article… what the guy is actually saving after renting a parking space.
I’m saying rents can and will go down, taxes and assessments don’t and won’t.
Fred,
The $289 also came from the article. It was based on the cost of renting the same unit at 235 Van Buren vs purchasing it.
You’re talking about an entirely different unit – the one at Silver Tower – than the one I’m talking about. And, it appears that he’s “renting out” a parking space rather than renting it.
Note that the comparisons are on a straight cash-outlay basis, and give no effect to income tax benefits from ownership. There are no tax benefits in renting.
This is all also assuming that condo prices stay the same or go up. If the value of the condo drops by 30%, as they have done over the previous 3 years, there is no possible way it is a better option.
Fred,
There are alternate scenarios where there’s little downside on purchasing in the rent vs own scenario outlined in the article.
A temporary, or even long-term dip in value doesn’t necessarily result in a realized loss if the unit is held and can be rented to cover after-tax costs. Depending on what happens with rents a unit could lose nominal value over a long term and still prove to be a profitable investment.
The most successful real estate investors I’ve known have always taken a very long-term approach to property.
One other thing that article does not take into consideration is that the property the client bought is actually MUCH nicer than the property he was renting (I saw both of them). If you were to compare 2 properties in very similar condition (one rental and one condo), then the spread could have been even larger in favor of homeownership.
Joe – the inventory comment leads me to ask your take on the so-called “shadow inventory” – do you think an increase in sales prices will get people to market properties which they have been holding on to?
SheridanB,
I’m always reluctant to speculate on what the future holds.
As an abstract proposition it makes sense that rising prices will bring more homes to market, but whether that will happen is just pure guesswork.
There’s been much talk recently of an “inventory shortage” of good homes, and plenty of anecdotal evidence that well-priced, well-located property in good condition sells quickly. But there’s little evidence, in Chicago at least, of rising prices, and certainly not the kind of across-the-board increases that inspire confidence in buyers.
Housing is shelter, and I’d hope that people would focus on that rather than on its investment value.
I’d agree with you on that (housing as shelter). Anecdotally (I’ll add some), the stuff in Hyde Park that is selling well is priced right, i.e. reasonably, is family sized and in decent condition. Other stuff is not moving.