Stedman Place Case Study: Buy or Rent?

Stedman Place Case Study: Buy or Rent?

Jon and Beth Linton are faced with a serious dilemma. In July 2006, their landlord notified them that he was raising the rent on their leased townhouse at 12 Stedman Place to $3600, an increase of 20%. The Linton’s had been living near Boston at 12 Stedman Place for the past two years, a time in which local home prices had risen dramatically. They like their townhouse and the easy commute to downtown, but were critical of the $600 a month increase in rent and decided to consider their options, as another unit at Stedman Place is available to purchase. Beth’s father has been a long-standing advocate of home-ownership and suggests that Jon and Beth buy a townhouse of their own: “Don’t throw money away money on rent when you could buy a house and build equity.” After consideration, the couple ultimately determined that they had two options:

A. Continue to rent their unit at 12 Stedman Place or an equivalent unit at a stepped-up rent of $3600, an increase of 20%, along with rental increases corresponding to inflation.

B. Purchase a nearly identical townhouse at 14 Stedman Place for $600,000. The couple would finance the purchase with an interest only loan at 6% with down payment of $120,000 and monthly mortgage payments of $2400 for their expected hold of 5 years.

To make an informed decision, the Linton’s must weigh the trade-offs and opportunity costs of purchasing an equivalent townhouse versus renting while also considering their future and unique financial situation:

Renting--- As tenants, the Linton’s would not be subject to the fluctuations of the Boston housing market. Home prices have risen “dramatically” in the past couple of years leading to both increased rents and inflated prices. After some softening in prices, many experts believed that, “there was a housing bubble and that prices might go down over the next few years.” The Linton’s would avoid volatility in the short-term by continuing to rent. Furthermore, leasing allows the Linton’s to be free of maintenance expenses, insurance charges, property taxes, and the managerial headaches that accompany home ownership. As a busy, young professionals, Jon and Beth may be better suited without such concerns complicating their respective day to day. While renting may seem like “throwing money away” it also allows the couple to maintain their nest egg of $150,000 in treasury bonds, giving them more liquidity and flexibility. Considering that the couple is not experienced in buying homes, is planning to move back to California in five years, and that the local market may be at the top of the cycle, timing of the purchase is risky. It is likely that the couple will be forced to sell in five years regardless of market changes, reducing flexibility for sale timing and limiting their upside.

Buying--- As homeowners,