Are most of the "rent-versus-buy" calculators on real estate-related websites "biased" in favor of home buying? Economists at one of the country's major apartment development trade groups say they have proof that they are.

After testing the popular calculators found on dozens of websites, the National Multi-Housing Council has branded virtually all of them "seriously flawed." Every online calculator examined by the council incorrectly estimated the actual tax savings for home buyers, according to Mark Obrinsky, chief economist for the apartment group.

To receive tax savings for owning a home, owners must itemize their deductions. But IRS data indicates that only half of all owners actually do itemize. The other half take the standard deduction -- $7,350 for a joint return in 2000 -- because it is more than what they paid in mortgage interest, property taxes and other deductions for the year.

The online calculators all mistakenly assumed that every user will get an annual tax benefit from buying. Even for those who do itemize, all the calculators evaluated by the council still overestimated the tax savings.

"The true (tax) savings" says Obrinsky, "is the amount by which total itemized deductions exceed the standard deduction, multiplied by the owner's marginal tax rate." Yet every rent-buy calculator tested incorrectly assumed that the tax savings from ownership equals the user's marginal tax rate multiplied by the full amount of mortgage interest and property tax paid each year.

That flaw alone virtually guarantees an unjustifiably optimistic estimate of the tax benefits from a "buy" versus a "rent" decision. Other calculator problems found by the council during its tests included:

• Asking users for too little information to make an accurate choice. Some calculators asked for just six pieces of information -- current rent paid by the consumer; the price of the prospective house; the amount of downpayment; annual income; tax-filing status; and length of time before the user intends to move. From these six pieces of data, some calculators then "hard-code" a welter of undisclosed assumptions (user's tax rate, mortgage type, projected rate of home price appreciation, and the rate of returns on alternative uses of downpayment capital) to produce a conclusion.

  Hard-coding assumptions like this "may make the calculators quick and easy to use," says Obrinsky, "but prevents customization to the user's actual situation, and makes it impossible to accurately check" the calculators' accuracy. As a result, according to the council, testing demonstrated their conclusions "often are wide of the mark."

• Failure to include downpayment amounts. "This makes it impossible to correctly calculate both the monthly payment and the 'opportunity cost' of owning versus renting" -- the return the renter could have earned by investing the downpayment funds in some other asset, like the stock market.

• Failure to incorporate home selling costs, mortgage points or opportunity costs into the buy-rent calculus, even when the site asks for one or more of those items. "Inexplicably," says Obrinsky, "they don't use (some of) the information they collect," but instead use the calculator's built-in assumptions to come up with a savings estimate for home buyers.

• Improperly treating certain pieces of data -- property taxes, homeowners insurance, property maintenance costs. Some sites assume these costs will rise at the same rate as inflation, which is incorrect.

Obrinsky insists his critique is "not intended to knock homeownership -- heck, I'm a homeowner myself." Nor should it be seen as an attack by a group with its own, obvious axe to grind in favor of rental housing. The problem, he says, is accuracy: Most rent-versus-buy calculators overstate the financial benefits of ownership and understate the costs.

More importantly, argues Obrinsky, they tend to understate the financial benefits of renting for large numbers of people, such as empty nesters or retirees who want to downsize and simplify their lives, or modest-income young people on tight budgets who are evaluating their options in a market where home price appreciation is cooling off.

For more articles by Ken Harney, please press here.

Published: July 23, 2001

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.