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Deciding Whether to Buy or Rent

By
Real Estate Agent with COLDWELL BANKER RESIDENTIAL BROKERAGE

By ANTOINETTE MARTIN

 IN today's market, with uncertainty the sole certainty up ahead, the age-old question - rent or buy? - becomes increasingly perplexing.

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James Leynse for The New York Times

A three-bedroom rental at Crest Ridge has 1,325 square feet.

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James Leynse for The New York Times

In West Orange, a three-bedroom house for sale at Winding Way has 2,269 square feet.

For example, in New Jersey, where average home values rose slightly only to drop precipitously last year, and where an additional 6 percent overall decline is predicted for 2011, is it even possible to discern which choice might be better?

Yes, said one market expert, after he crunched fresh numbers. Despite unusually severe fluctuations and distress in the New Jersey marketplace, the analyst, Jeffrey G. Otteau, concluded that it is a better deal to buy, as long as one holds on to the property for several years.

Using calculations based on sales data, Mr. Otteau deduced the following: After four years, the buyer of a $400,000 home, putting 3 percent down and obtaining a mortgage at 4.83 percent, will start to come out ahead of a renter paying $2,000 a month.

The gain in the fourth year is only about $7,000, once expenditures on maintenance, insurance, taxes and mortgage are figured in, said Mr. Otteau, whose company, theOtteau Valuation Group, provides monthly trend reports to the real estate industry.

But after 10 years, and assuming a 2.5 percent average increase in value, the homeowner comes out $97,516 ahead.

A property value increase of that amount per year is a "very conservative" prediction, Mr. Otteau said, and several brokers in the northern part of the state agreed with him.

"If you buy a good property in a stable community," said Karen Eastman Bigos, who heads the Towne Realty Group in Millburn, "with today's bargain prices and interest rates, it is virtually guaranteed that value will rise by more than that."

Statewide over the last decade, values increased by an annualized average of 4.8 percent, despite the price declines of the last three years, Mr. Otteau said.

"Going back to 1972, when this kind of record-keeping first began," he added, "prices have increased by an annualized average of 4.9 percent. So the big, broad average for close to 60 years has been an increase of approximately twice as much as we are estimating for the purpose of this calculation."

If average sale values remained the same for the next decade, while rental rates rose by 2.5 percent each year, renters would come out ahead of buyers, Mr. Otteau said.

"However," he added flatly, "that's not going to happen."

If values appreciated by 5 percent annually, the buyer of the $400,000 home would gain $138,081 over the renter in 10 years. Mr. Otteau said similar results would generally hold true across the price spectrum.

The calculations indicated that a buyer making a 10 percent down payment would gain slightly less than a buyer paying 3 percent - mostly because of the home mortgage deduction on income taxes. (With a larger mortgage comes a larger deduction.)

But, noted Roberta Baldwin, a broker with Keller Williams Realty in Montclair, not all decisions about whether to rent or buy are made on the basis of finances. "Lifestyle figures in heavily," she said, "and so does availability."

"More buyers are turning into renters," she added, "because everyone is ultracautious about buying now, but the fact is there aren't all that many great rentals available in this area."

This is the sort of intangible that does not show up in Mr. Otteau's calculations. Also, the space that comes with a $400,000 home is significantly different from that to be expected in a $2,000 rental, he said.

One example from West Orange is a 2,269-square-foot house at 76 Winding Way that is for sale at $400,000, after seven months on the market and several price reductions. The house, a 60-year-old Cape Cod, has three bedrooms and two and a half baths, and it sits on 0.18 acre.

By comparison, a three-bedroom two-bath unit at Crest Ridge, a building with a pool and landscaped gardens, rents for $1,920; it offers 1,325 square feet.

Two couples who recently settled in Jersey City - one pair buyers, the other renters - said they had made their choices primarily out of a desire to live in new buildings with easier commutes to Manhattan.

Sarah Lane and Luis Ribagorda, married dancers with the American Ballet Theater, had been renters in Manhattan and then Union City when they saw prices falling and felt "a strong impulse to buy," Ms. Lane said. They were the first buyers at the glass-walledCrystal Point tower when it opened early last year, with prices discounted even before the building was complete.

At 26 and 27, they did not have enough credit history to qualify for the lowest possible loan rate, Ms. Lane said, but they were able to put 20 percent down, so their monthly payment would be as low as possible. "My husband saw this beautiful building, with a very prestigious location right on the waterfront, between two PATH stations," she said, "and right away he was convinced it would have great resale value."

Even with the gloomy economy, Ms. Lane said, the couple are convinced they made a smart investment.

Camille and Michael Adams, both 54, decided they were willing to pay somewhat more per month in rent than they had been paying on the mortgage for their 1,700-square foot house in Hempstead, on Long Island. They leased a two-bedroom in the 225 Grand, which opened last fall.

The Jersey City location reduced Mrs. Adams's commute to Manhattan to 20 minutes from 90, and she says it has also shortened travel to their daughter's place in Pennsylvania.

"I think renting is the smart choice at our age," Mrs. Adams said.

 

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