Buy or Rent
| Market Assumptions | |||
| Inflation | % | ||
| Real Investment Return Rate | % | ||
| Real Pre-Tax Discount Rate | % | ||
| Real Home Price Growth | % | ||
| Real Rent Growth | % | ||
| Mortgage | |||
| Home Value | $ | k | |
| Mortgage Interest Rate | % | ||
| Percent Down | % | ||
| Duration | months | ||
| Taxes | |||
| Property Tax Rate | % | ||
| Marginal Income Tax Rate | % | ||
| Marginal Capital Tax Rate | % | ||
| Standard Deduction | $ | ||
| Non-Mortgage Itemized Deductions | $ | ||
| Home Costs | |||
| Commission | % | ||
| Non-Mortgage Monthly Costs | $ | ||
| Home Equity Protection Plan | |||
Equivalent Lump Sum:
Equivalent Rent:
Justifications for the Default Values
- Inflation T30YIEM
- Real Pre-Tax Discount Rate - approximated using the historical risk-adjusted S&P 500 return
- Home price increase - the Case Shiller index historically has shown an 0.4% annual increase in property prices Shiller; however, that index is biased upwards Nowak and the true appreciation is ~0% on average. In general, after controlling for the national Case-Shiller index, the change in a metropolitan area's Case-Shiller indices over the last N years doesn't predict the next N years, so I suggest not changing this field based just on the last N years at the locality you're looking at.
- Rent price increases CUUR0000SEHA
- Mortgage interest rate MORTGAGE30US
- Property tax rate - based on eye-balling the rate in a few counties in California
- Marginal Income Tax Rate and Standard Deduction IRS provides tax inflation adjustments for tax year 2021
- Commission Average Real Estate Commission in California
Assumptions
- Rent and "Non-Mortgage Monthly Costs" both increase with inflation
- You don't do anything "special" with your mortgage like default, refinance, sell prematurely, etc. TODO: Consider assuming you always pick a 30-year mortgage but break it after the selected number of years.
- This calculator does not account for risk except for the discount rate computation. It's not very clear which way that biases the decision: on the one hand, a house ties up a large amount of wealth in a single asset; on the other, home prices tend to be more stable than stock prices.
- The cost of a home equity protection plan is 2% of a home's value.
- In both simulations, the simulator assumes you invest all excess savings in the stock market with no leverage and that the stock market experiences volatility similar to the historical norm. To be clear, though, if you don't buy a home you certainly should be using leverage in some way while investing, so this biases the simulation against renting.