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Approximate cost to own mortgaged property vs. renting. An approximate formula for the monthly cost of owning a home is obtained by computing the monthly mortgage, property tax, and maintenance costs, accounting for the U.S. tax deduction available for mortgage interest payments and property taxes.This formula does not include the cost of foregoing the standard deduction. Assuming a home cost of P dollars, yearly interest rate r fixed over N years, marginal income tax rate r I T {\displaystyle r_{\rm {IT}}} , property tax rate r P T {\displaystyle r_{\rm {PT}}} , and yearly maintenance cost rate r M {\displaystyle r_{\rm {M}}} , the monthly cost of home ownership is approximately
For example, the monthly cost of a $250,000 home at 6% interest fixed over 30 years, with 1% property taxes, 0.75% maintenance costs, and a 30% federal income tax rate is approximately $1361 per month. The rental cost for an equivalent home may be less in many U.S. cities as of 2006. Adding a down payment or home equity to this calculation can significantly reduce the monthly cost of ownership, while significantly reducing the income stream that the downpayment would generate in a long term CD. Including the monthly cost of forgoing the standard deduction , the added cost of would increase the cost to buy a home by $250/mo, to $1611 for a married couple filing jointly in the example above.
For the example of the $250,000 home considered above, the P/E ratio would be 24 if this home rents for $1250 per month. Fortune cites a historic range of 11 or 12 for the simpler price-to-rent ratio.
Observers and analysts have attributed the reasons for the 2001–2006 housing bubble and its 2007–10 collapse in the United States to "everyone from home buyers to Wall Street, mortgage brokers to Alan Greenspan". Other factors that are named include "Mortgage underwriters, investment banks, rating agencies, and investors", "low mortgage interest rates, low short-term interest rates, relaxed standards for mortgage loans, and irrational exuberance" Politicians in both the Democratic and Republican political parties have been cited for "pushing to keep derivatives unregulated" and "with rare exceptions" giving Fannie Mae and Freddie Mac "unwavering support".