Author Topic: i did the math, is buying a house a good idea?  (Read 8323 times)

FuckRx

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i did the math, is buying a house a good idea?
« on: May 01, 2014, 10:20:46 AM »
I just want to make sure I'm making the right financial decision. I have the means to afford a house but I'm paying 825/mo in rent. The cheapest house I could buy would be high 400's, likely 500k. The cheapest condo would be 250k.
I don't have a need for a permanent residence and I'm ok with a rental. But my effective tax rate was 39.6% last year so I don't know if that would/should affect my decision in taking on a mortgage.
I should add that if I did buy a place I would rent out any extra rooms.


edit: more info
« Last Edit: May 01, 2014, 10:31:10 AM by FuckRx »

brandino29

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Re: i did the math, is buying a house a good idea?
« Reply #1 on: May 01, 2014, 10:30:42 AM »
Damn, where are you that you're only playing $825 in rent but the cheapest house you could find would be $500k?  Or do you have roommates?  Definitely sounds like a renters' market. 

Obviously there are so many little things that affect those estimators.  Lower your purchase price to $400k, increase appreciation to 4%, and stay in the house 10 years and it will be an entirely different picture.

If you're comfortable where you're at, then definitely seems to be no reason to change course.  Plus, that'll give you more flexibility down the road if you choose to move, start a family, etc and you'll be sitting on a much larger pile of cash to buy a place then.  Beware cost of living creep however, if over time you move to a $1,000/month apartment, then decide you want a swankier place and move on to a $1,500/month even though you can 'afford it,' you could quickly erase your current financial advantage of renting. 

Le Dérisoire

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Re: i did the math, is buying a house a good idea?
« Reply #2 on: May 01, 2014, 10:49:42 AM »
The thing to keep in mind is that, in a balanced market, renting and owning the same individual apartment or house costs more or less the same thing (this statement does not necessarly apply to owning multi-plex or big towers).

By costs, I mean an accountant (or business) way of calculating costs that includes the opportunity cost and does not include the capital part of your mortgage payment.

In a balanced market, you "throw out of the window" as much money by renting than by owning.

The New York times tool is useful, but make sure to use the 'Advanced settings' so it calculates your actual cost. By default, the tool use a 4% return on investment to calculate opportunity cost, which is quite low if you're invested mostly in stocks (average of 9% before fees and taxes).

I did the math for where I live and it would cost me 400$ more every month to own rather than to rent (I rent even if I could buy the house in cash). But it's Canada, one of if not the most overvalued real estate market in the world.

If you read french, I have really good and serious books on the subject to recommend if you want to dig in the numbers.

Other false beliefs include: "Owning is better than renting because you accumulate equity over the years", "A house is an investment", "Renovations will raise the value of your house by more than the cost of the renovation", "Renting is paying the owner while owning is paying yourself"...
« Last Edit: May 01, 2014, 10:57:45 AM by Le Dérisoire »

waltworks

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Re: i did the math, is buying a house a good idea?
« Reply #3 on: May 01, 2014, 10:58:01 AM »
Assuming you don't hate where you rent, I would not buy. Yes, you can write off mortgage interest but it's not going to make enough of a difference to matter. Sounds like you are in the highest tax bracket possible and making big $ - how does the house fit into your FI plan?


-W

I just want to make sure I'm making the right financial decision. I have the means to afford a house but I'm paying 825/mo in rent. The cheapest house I could buy would be high 400's, likely 500k. The cheapest condo would be 250k.
I don't have a need for a permanent residence and I'm ok with a rental. But my effective tax rate was 39.6% last year so I don't know if that would/should affect my decision in taking on a mortgage.
I should add that if I did buy a place I would rent out any extra rooms.


edit: more info

payitoff

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Re: i did the math, is buying a house a good idea?
« Reply #4 on: May 01, 2014, 11:01:41 AM »
are you handy?
do you like to personally do the maintenance, fixing, mowing the lawn, upkeep etc.?

i'd like to ask this because i think this is the only advantage of renting, you get a free ticket in replacing a busted light or your toilet is clogged. Plus with a small space, utilities are lesser and less cost and labor to clean it.

with your income, you would want to buy and quickly pay off that house, so i dont think its a benefit to you since you get the tax break off of the interest you pay on the mortgage. 

you mentioned you're willing to rent out spare rooms, maybe you'd like to consider a duplex or 4-plex instead, this way you still have your own privacy, and maybe hire a property manager to maintain/screen/communicate with your tenants since you're a very busy man.  normally property managers charge either a month's rent or 10% of the annual rent for their services, which can be a tax advantage for you.

FuckRx

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Re: i did the math, is buying a house a good idea?
« Reply #5 on: May 01, 2014, 11:03:59 AM »

as for FI plans, I'm hoping to be there in 5 years and I don't see renting vs buying making a difference either way.

Le Dérisoire

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Re: i did the math, is buying a house a good idea?
« Reply #6 on: May 01, 2014, 11:12:00 AM »
with your income, you would want to buy and quickly pay off that house, so i dont think its a benefit to you since you get the tax break off of the interest you pay on the mortgage. 

Remember that the 500K$ that will be in equity (I assume you pay the house cash) is not invested in the stock market. On the long term in Canada, real estate value goes up only a little bit more than inflation. That's 500K$ doing 2.5% a year. What a waste!

Of course, by owning you don't have to pay rent anymore. But you will have to pay for renovations (make sure to include in your calculation the rare but very costly renovations), general maintenace, insurances, taxes...

Do the math! You could be very surprised by the result! I assure you that your step-mom that tells you to buy a condo every time she sees you is wrong.

foggnm

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Re: i did the math, is buying a house a good idea?
« Reply #7 on: May 01, 2014, 11:12:45 AM »
I guess it depends on how much the house will appreciate. Honestly at such low rent, seems unlikely it will be a better investment to buy. You will probably spend about a third of your yearly rental amount just on 'home improvements' every year. Then you show your property tax is about $5k. In retrospect, I wish I would have rented over the last 10 years. It isn't my mortgage or the equity that has been a problem, it has been that houses eat up so much in improvements (unless you're buying a house that is new or in perfect updated condition).

waltworks

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Re: i did the math, is buying a house a good idea?
« Reply #8 on: May 01, 2014, 12:06:05 PM »
Ok, if you are going to be FI in 5 years making big $ and not spending much, the question is: do you want to tie up a bunch of your money in a house *now*? You get advantages taxwise, can paint-and-renovate how you wish, get a gold star for being a homeowner. You also have to do more maintenance and deal with more hassles (probably) and will have to figure out what to do with the place if you want to move.

Since it doesn't matter either way to you financially (at your income level I think that's true) the decision is really an emotional one - do you want to tie yourself to the area and own a home? Will owning a home make you happy? Or do you want to move somewhere else in a few years and not deal with the hassle?

-W


as for FI plans, I'm hoping to be there in 5 years and I don't see renting vs buying making a difference either way.

dragoncar

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Re: i did the math, is buying a house a good idea?
« Reply #9 on: May 01, 2014, 01:17:59 PM »
You have to compare apples to apples though.  Are you renting a similar house to the one you would buy?

edit:  I'm not trying to convince you to inflate your lifestyle, but if you are in an apartment now for example, the math  might say buying a similar condo is better.

I never understood why NYT defaults to 2% for house appreciation and 3% for rent appreciation.  I feel like they should both be set to expected inflation (3%?). 
« Last Edit: May 01, 2014, 01:19:45 PM by dragoncar »

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FuckRx

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Re: i did the math, is buying a house a good idea?
« Reply #11 on: May 01, 2014, 04:04:12 PM »

I think I understand what you are saying. Essentially I'm comparing a real tiny place's rent to a nice house's cost.
An equivalent condo wouldn't be much cheaper in my neighborhood, probably 430k. I picked 500k for the house just in hope of a fixer upper but I doubt I'd find anything under 650k.


You have to compare apples to apples though.  Are you renting a similar house to the one you would buy?

edit:  I'm not trying to convince you to inflate your lifestyle, but if you are in an apartment now for example, the math  might say buying a similar condo is better.

I never understood why NYT defaults to 2% for house appreciation and 3% for rent appreciation.  I feel like they should both be set to expected inflation (3%?).

ruthiegirl

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Re: i did the math, is buying a house a good idea?
« Reply #12 on: May 01, 2014, 05:07:04 PM »
I guess I would think about the week that you are working 60 hours and the lawn needs to be mowed and the garage paint is peeling and the sewer backs up.   

Or the day when you meet a magical woman, but she lives in anther state and you want to take off and see her for a month.

Honesty, house are a pain in the ass.  And from what I have gleaned from your other posts, you have little free time to play and socialize. 

Houses can wait.  Go outside and have some fun. 

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #13 on: May 02, 2014, 07:07:27 AM »
Did you read the top line on your graphic?

"Buying is never better than renting after 30 years."

Doesn't that answer the question?

In other words - what are you confused about?
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Johnny Aloha

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Re: i did the math, is buying a house a good idea?
« Reply #14 on: May 02, 2014, 01:51:06 PM »
If your assumptions are correct, obviously renting is better.

But are your assumptions correct, especially for house appreciation?  Depending on where you live, 2% appreciation on a $500k house might be too low.   You might want to look at historical appreciation, and especially how the market performed in the "bust" years. 

FuckRx

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Re: i did the math, is buying a house a good idea?
« Reply #15 on: May 03, 2014, 12:30:44 PM »
Did you read the top line on your graphic?

"Buying is never better than renting after 30 years."

Doesn't that answer the question?

In other words - what are you confused about?

Do I seem confused to you?

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #16 on: May 03, 2014, 01:13:20 PM »
Did you read the top line on your graphic?

"Buying is never better than renting after 30 years."

Doesn't that answer the question?

In other words - what are you confused about?

Do I seem confused to you?

I would assume so, considering you made a post where the subject is "i did the math, is buying a house a good idea?"

If you weren't confused, and you knew the answer to that, why would you post?

/shrug
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money_bunny

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Re: i did the math, is buying a house a good idea?
« Reply #17 on: May 04, 2014, 03:31:35 PM »
Anything he could do when he's not itemizing to hide some of this money that's not going to a house?

smedleyb

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Re: i did the math, is buying a house a good idea?
« Reply #18 on: May 06, 2014, 05:37:21 AM »
If your assumptions are correct, obviously renting is better.

But are your assumptions correct, especially for house appreciation?  Depending on where you live, 2% appreciation on a $500k house might be too low.   You might want to look at historical appreciation, and especially how the market performed in the "bust" years.

According to this graph from Robert Shiller, the chances of home appreciation keeping up with inflation is slim:



That's very little movement over 120 years.  Contrast that with the S&P, which is up 2000% adjusted for inflation over the same time.

Obviously that's not the only data point to consider when evaluating a home qua investment, but it certainly is a compelling reason to not tie up all your eggs in this one financial basket over the long haul. 

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #19 on: May 06, 2014, 07:16:41 AM »
According to this graph from Robert Shiller, the chances of home appreciation keeping up with inflation is slim:



That's very little movement over 120 years. 

Uhhh, what?

That chart shows it keeping up with inflation exactly as Johnny said.  The chart is in real terms, i.e. inflation adjusted.  That "very little movement" you cite means it exactly is keeping up with inflation...

If it wasn't keeping up with inflation, it would be declining in real terms, but it's not, it's flat.
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dragoncar

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Re: i did the math, is buying a house a good idea?
« Reply #20 on: May 06, 2014, 07:32:04 AM »
According to this graph from Robert Shiller, the chances of home appreciation keeping up with inflation is slim:



That's very little movement over 120 years. 

Uhhh, what?

That chart shows it keeping up with inflation exactly as Johnny said.  The chart is in real terms, i.e. inflation adjusted.  That "very little movement" you cite means it exactly is keeping up with inflation...

If it wasn't keeping up with inflation, it would be declining in real terms, but it's not, it's flat.

Maybe he's arguing for a mean reversion or something like that (back down to 100)

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #21 on: May 06, 2014, 08:07:28 AM »
Maybe he's arguing for a mean reversion or something like that (back down to 100)

Homes are bigger now, so I wouldn't be surprised if 125 was the new 100 (in other words, one may need to set the 1990 level as 100, rather than the 1890 level), and that it stayed flat around 125.  Either way, I think we're all in agreement that home prices won't beat inflation, but nor should they lag inflation, right?
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dragoncar

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Re: i did the math, is buying a house a good idea?
« Reply #22 on: May 06, 2014, 08:30:06 AM »
Maybe he's arguing for a mean reversion or something like that (back down to 100)

Homes are bigger now, so I wouldn't be surprised if 125 was the new 100 (in other words, one may need to set the 1990 level as 100, rather than the 1890 level), and that it stayed flat around 125.  Either way, I think we're all in agreement that home prices won't beat inflation, but nor should they lag inflation, right?

On average, yes I'd expect homes to generally match inflation.  But obviously the market can distort in either direction at the local level, and short term.

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #23 on: May 06, 2014, 08:33:08 AM »
Maybe he's arguing for a mean reversion or something like that (back down to 100)

Homes are bigger now, so I wouldn't be surprised if 125 was the new 100 (in other words, one may need to set the 1990 level as 100, rather than the 1890 level), and that it stayed flat around 125.  Either way, I think we're all in agreement that home prices won't beat inflation, but nor should they lag inflation, right?

On average, yes I'd expect homes to generally match inflation.  But obviously the market can distort in either direction at the local level, and short term.

I absolutely agree.

But how we got on this tangent is that Johnny suggested that 2% might be low for the home appreciation, and that one might want to set it to what they think inflation will be. (And then smedley said homes don't match inflation, while posting a graph showing that they do.)

Unless you have some compelling reason to think your local market will be above or below inflation for some particular reason, I think the assumption of your house matching inflation is a fairly reasonable one, and more likely to be accurate than not.
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dragoncar

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Re: i did the math, is buying a house a good idea?
« Reply #24 on: May 06, 2014, 08:46:35 AM »
Maybe he's arguing for a mean reversion or something like that (back down to 100)

Homes are bigger now, so I wouldn't be surprised if 125 was the new 100 (in other words, one may need to set the 1990 level as 100, rather than the 1890 level), and that it stayed flat around 125.  Either way, I think we're all in agreement that home prices won't beat inflation, but nor should they lag inflation, right?

On average, yes I'd expect homes to generally match inflation.  But obviously the market can distort in either direction at the local level, and short term.

I absolutely agree.

But how we got on this tangent is that Johnny suggested that 2% might be low for the home appreciation, and that one might want to set it to what they think inflation will be. (And then smedley said homes don't match inflation, while posting a graph showing that they do.)

Unless you have some compelling reason to think your local market will be above or below inflation for some particular reason, I think the assumption of your house matching inflation is a fairly reasonable one, and more likely to be accurate than not.

Yeah, I sometimes use today-dollars in NYT calc.  0 home appreciation, 0 rent increase, 0 inflation rate, "real" expected investment returns, etc.  Just makes things simpler (based on the defaults, the NYT thinks rent will increase at 1% above inflation... why?  is there a study?).  It may be inaccurate due to leverage though?

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #25 on: May 06, 2014, 09:04:57 AM »
Rents can't increase much faster than wage increases (not inflation - in fact if we see inflation in things like food and energy, but no wage increases, that might leave people with less to pay towards rent) .  Rents can only be what people can pay.

Quote
It may be inaccurate due to leverage though?

That's interesting.  I'd have to look at the calculator to see what they're doing exactly, but yeah, if you're leveraged and have 0% appreciation you aren't getting those benefits you would if you're seeing 3% appreciation and 3% inflation - still the same 0% real return, but due to leverage you're coming out ahead in the latter scenario.
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dragoncar

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Re: i did the math, is buying a house a good idea?
« Reply #26 on: May 06, 2014, 09:12:05 AM »
Rents can't increase much faster than wage increases (not inflation - in fact if we see inflation in things like food and energy, but no wage increases, that might leave people with less to pay towards rent) .  Rents can only be what people can pay.

Quote
It may be inaccurate due to leverage though?

That's interesting.  I'd have to look at the calculator to see what they're doing exactly, but yeah, if you're leveraged and have 0% appreciation you aren't getting those benefits you would if you're seeing 3% appreciation and 3% inflation - still the same 0% real return, but due to leverage you're coming out ahead in the latter scenario.

Yeah my "today dollars" approach has gotta be wrong with leverage... obviously if you assume an inflation rate higher than your mortgage, and home appreciation equal to inflation, you're going to be better off buying.  Too bad I lost my crystal ball in a boating accident.

smedleyb

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Re: i did the math, is buying a house a good idea?
« Reply #27 on: May 06, 2014, 11:31:40 AM »
Maybe he's arguing for a mean reversion or something like that (back down to 100)

This was my thinking as prices are roughly 25% above the historic average, so going forward home prices will struggle to match, let alone surpass, inflation rates.  I kind of cobbled the post together and should have been more explicit. 

Johnny Aloha

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Re: i did the math, is buying a house a good idea?
« Reply #28 on: May 13, 2014, 05:12:58 AM »
But how we got on this tangent is that Johnny suggested that 2% might be low for the home appreciation, and that one might want to set it to what they think inflation will be.

Sorry for the long delay - international travel can be so distracting sometimes!

I was suggesting that the 2% appreciation might be too high for some areas of the country, but also could be too low for others.  Robert Shiller's graphs are typically a combined index of 20 housing markets.  The housing markets consist of places like Detriot, LA, Miami, and Houston.  All have much different charecteristics.  2% appreciation is probably low for LA, but high for Detroit.

If I was the OP, I'd look at historical (30 or 40 year) appreciation for my local market, and use that as the appreciation rate.

GuitarStv

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Re: i did the math, is buying a house a good idea?
« Reply #29 on: May 15, 2014, 01:06:11 PM »
Mortgage rate of 4.5%????


WOW that's high.  Around here you can get a variable mortgage at 1.9% easy . . . 2.8 for a 5 year fixed.

clifp

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Re: i did the math, is buying a house a good idea?
« Reply #30 on: May 17, 2014, 04:54:55 PM »

I think I understand what you are saying. Essentially I'm comparing a real tiny place's rent to a nice house's cost.
An equivalent condo wouldn't be much cheaper in my neighborhood, probably 430k. I picked 500k for the house just in hope of a fixer upper but I doubt I'd find anything under 650k.


You have to compare apples to apples though.  Are you renting a similar house to the one you would buy?

edit:  I'm not trying to convince you to inflate your lifestyle, but if you are in an apartment now for example, the math  might say buying a similar condo is better.

I never understood why NYT defaults to 2% for house appreciation and 3% for rent appreciation.  I feel like they should both be set to expected inflation (3%?).


It appears that you live in a place where housing prices have historically appreciated much faster than inflation and/or weren't hurt too much in 2006-8 real estate crash.
Essentially the only way in would make financial sense,there are other reasons, to buy there is if you expect housing to continue to appreciate at rate higher than inflation.

You say that condo comparable to what you are renting cost $430K and rents for $825. I happen to have two properties that rent in a similar range in Vegas (and I bet Arebelspy has many)
A 2 bedroom, 2 bath Condo that was renting for $750 that I might be able to get $800 for but I am instead putting it on the market at $90K. I also have a 3 bedroom, 2 bath house that is currently renting at $850 and Zilliow says is worth about $110K.  So as you can see I am getting roughly 4x more rent per thousand dollars than folks in your area.  If somebody could come up with the 20% down they could buy my condo for less than renting ~$700 including condo fees.

In general the tax advantages for owning are more important when you are working than retired so if you are planning on retiring soon that is another consideration.

Pixelshot

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Re: i did the math, is buying a house a good idea?
« Reply #31 on: May 22, 2014, 07:24:48 AM »
Here's a calculator that the NY Times just posted on it's web site. It does a great job of factoring in not just all of the major costs, but all of the nickel and dimes ones as well:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?hp

arebelspy

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Re: i did the math, is buying a house a good idea?
« Reply #32 on: May 22, 2014, 07:37:50 AM »
Here's a calculator that the NY Times just posted on it's web site. It does a great job of factoring in not just all of the major costs, but all of the nickel and dimes ones as well:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?hp

Yes, that's the calculator used in the first post by the OP, that they posted a screenshot from.
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totoro

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Re: i did the math, is buying a house a good idea?
« Reply #33 on: May 22, 2014, 08:03:44 AM »
How much rent from the rooms?  Is that going to be sustainable long-term?  I don't want room-mates myself.  In my twenties it was fine but after that - no.  How about you?  Might be better to purchase something with a separation of space for rental income if you can.

The NYT calculator does not factor in rental income and you may be pleasantly surprised at how much of a difference this makes to the rent v. buy comparison over time.

Here is a calculator you can use that factors this in:   http://members.shaw.ca/needinbox/wait-or-buy-v6a.pdf

It is Canadian but it should give you an idea of what to expect.  In addition, it lets you factor in a price drop or rise and see the effect.