So you finally got that big job in New York City – perhaps the pinnacle of your career.
Now, how do you actually afford to live there?
In most cities, buying is a better deal than renting – but which is right for you depends on a variety of factors, both financial and personal.
5 REASONS YOU SHOULD RENT
• New York prices are higher than just about any other market. When a major business publication headlines an article “Manhattan Homes Under $3 Million Never Harder to Buy,” you know you’re aiming for a pricey market. According to BloombergBusiness, the median price for a two-bedroom apartment in Manhattan is more than $1.35 million and a three-bedroom unit is double that. Nationally, the median price for a home is about $214,000.
While it depends how finely you slice the data – are you considering just Manhattan, or all five boroughs of New York City, or the much broader New York metropolitan area – it’s clear that prices are at or near the top, joined by regions in California and Hawaii.
• New York State has one of the tightest markets for deciding whether to buy or rent. According to Jed Kolko, chief economist for the real estate data firm Trulia, Inc., buying is 38 percent cheaper than renting nationwide – “and buying is cheaper than renting in all of the 100 largest metros,” he wrote. But the picture is more complicated in California and New York. Right now, unusually low mortgage interest rates make buying the better option. If rates go up over 7 percent, then renting becomes cheaper than buying.
• New York has a widely varied rental market. While Manhattan gets the spotlight, rentals in outer boroughs can be had for far less money and might better fit into your budget, especially if you are just starting out and don’t have money for a down payment. From borough to borough, and within each borough, there is great variability in prices – many in up-and-coming neighborhoods.
• No maintenance, real estate tax or upkeep costs. Buying property can entail lots of additional, and sometimes unexpected, costs. Between repairs, regular upkeep, and renovations you may want to make, the price of home ownership goes way beyond the monthly mortgage. If the idea of calling the super to fix things that break is more appealing than fixing them yourself, renting may be your best option.
• You have flexibility. While you will likely enter into a lease, renting provides you with more flexibility should your job or income change. Renters usually can decide to move with a notice of a month or two, while homeowners likely face a more drawn-out transition of listing and selling their property. The cost of buying and selling add up, so if you don’t see yourself staying in the property for a while, it probably does not make sense to buy.
5 REASONS YOU SHOULD BUY
• New York prices are sky high – but less erratic than other cities. While the housing market hit its highs before the Great Recession and then tumbled, some markets got walloped while others stagnated. An analysis by The Wall Street Journal on Manhattan (behind pay wall) shows prices dipping from 2008 to 2009 but just slightly – and then resuming their upward trend. A review by The New York Times shows prices in the broader New York area dropping after the recession, but experiencing less volatility than markets such as Phoenix or Las Vegas.
• New York City isn't just Manhattan. Location, location, location. In the New York area, that’s just as true – and once you get out of the New York constantly seen on TV, housing in outer boroughs is far cheaper. Jonathan Miller, president and chief executive officer of Miller Samuel Inc., real estate appraisers and consultants in New York, says only the borough of Brooklyn has actually exceeded the price records set before the beginning of the financial crisis.
• There are tax benefits to owning. Being a homeowner means getting a tax break. Mortgage-interest costs and property taxes are deductible, which can add up to big savings over time. Also, as you build equity in your home, you are also creating value that you can borrow against. If you buy one of brownstone row houses Brooklyn is famous for, your house may come with one or more rental units, allowing you to depreciate that portion of the house.
• You build long-term investment value in the form of equity in your home. If you don’t have the discipline to regularly stash money away, having to pay your mortgage monthly is like a forced savings plan. And real estate can be a good investment. Home prices generally rise faster than rent. Despite some ups and downs, overall home prices in New York have increased substantially in the past four decades. When you sell, the increase in value is taxed at the capital gains rate, which is lower than your income tax rate.
• The pay-off may coincide with retirement. Buying means you’ll eventually pay the mortgage off after 30 or so years. Then, provided you stay put, when you retire you may no longer have monthly housing payments – giving you more money for other needs in your later years.
There are multiple rent-or-buy calculators, some very simple and others very sophisticated. Most generally start with the assumption you know how much you could spend buying or renting and then allow you to factor in mortgage rates, your tax rate, property taxes, and upkeep expenses.
One of the most elaborate is from The New York Times. Others come from the National Association of Realtors, Trulia.com, and Regions Bank.
THE BOTTOM LINE
New York housing prices are among the highest in the country, but values have appreciated over time. So, if you plan to keep a property for a few years, buying can be a good investment – if you have enough cash for a down payment and to cover ongoing maintenance costs. Tight credit is making it difficult for some first-time buyers to get financing, notes Miller of Miller Samuel Inc. This “logjam” has made the rental market more expensive than the purchase market as a general rule, he says. The ultimate decision to buy or rent may not be about which market is more affordable, but whether you can qualify for a loan. (For related reading, see "Living in New York City: Co-ops vs. Condos")