Continue Renting or Buy the Apartment?

By: Simon Salloom

Several times a week someone tells me, "My friends say wait to buy because the market is going to go down this year." I am sure these same people were saying the same thing last year when the median sales price in Los Angeles went up 7.3%. The not so great news was that the number of sales went down from 8,269 in 2005 to 6,888 in 2006 in Los Angeles. In 2006 the average days on market went up from 41 to 57 days. However, 2005 was a record year for real estate sales. The fact that the pace of sales decreased in 2006 means the market hifted from going a metaphorical 100 miles per hour, a pace that is impossible to maintain, to a more sustainable 70 miles per hour. Real estate values are still going up and the market is still strong.

For an example, let's focus on Santa Monica Condominium sales. Last year, when the "bubble" was bursting, median sales prices went up 12.3%. Let's say for example that you didn't listen to your friends or the media and purchased a home last year for $700,000. At the median increase in value of 7.3%, you would have enjoyed about .6% or $4,200a month increase in value. If you owned in the right part of Santa Monica, you would have experienced an even greater gain.

Today, many people have the misconception that it is better to rent than to own. It may be better to rent if you don't plan on being in the same place for more than a year or two. Additionally, if you just moved to Los Angeles or Santa Monica and don't know what neighborhood will work best for you, renting is a good idea. There are also some people who can't come up with the money every month for the mortgage, taxes and home expenses. For all the rest of you, households making a combined income of about $90,000 a year or more, it is a good business decision to buy.

Thanks to the media created "bubble" hype, and an ever increasing demand for shelter in Los Angeles, rents have increased about 12% citywide in the past year. Many rental seekers have said they see closer to a 15-20% gain in Santa Monica. You can buy a very nice 2br condo in a great Santa Monica neighborhood for around $700,000. This same condo will now rent for around $2,800-3,200 a month. To own it, with a 6.25% interest rate, 1.25% taxes on an annual basis and $300 a month in dues, it will cost you approximately $4,900 a month. However, after taxes at 30% (many people pay more), your effective cost is about $3,100 a month.

If you hold onto this same property for the next five years and enjoy a modest 3% or $21,000 increase in value per year, you will make over $100,000 in equity. If you sold and paid about 6% in closing costs, clearing $40,000, your effective cost of homeownership is only about $2,400, less than renting and a steal of a deal if you consider that rents will also be going up over the five years that you own the property. It may also be notable to you that a 3% increase in value is very conservative. The average increase in property values nationwide since the 1950's is about 6% and even higher in California.

So, barring any great economic calamity that no one can predict, it is less expensive to own than to rent. The sky is not going to fall, and people will continue to enjoy the pleasure of owning their own home. I hope that this column has given you some solid numbers on what will work best for you.

All statistics taken from the Multiple Listing Service of the local, Beverly Hills Greater Los Angeles Association of Realtors.

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