Dear Cribline readers:
I often hear about people wanting to leave DC and move to the suburbs because they believe it is less expensive. Now, there is a new report out that challenges that notion. Take a look at a news report by Brett Arends from Smart Money and what he describes as a new “golden age for the American city.” (hat tip to my best friend Jim… thanks for sharing this).
Here’s what Arends says:
“…McKinsey & Co., the strategy consultant, recently produced a report predicting a new golden age for the American city. When I was growing up, the story of the American city was a sad one. The middle class had fled to the suburbs. Downtown was dying. But based on my math, people are going to be moving back.
“Three reasons: Interest rates. Gas prices. And the Internet. Let me explain.
“Sure, real estate outside the city looks cheaper. But then we’d have to buy two cars.
“And while the cost of a car is going up, the cost of real estate has come down, thanks to the collapse in interest rates.
“I did the math.
“Thirty-year Treasury bond yields have now plummeted to 2.5%. The ten year is down to 1.44%. You can thank the Federal Reserve, as well as the economic slump.
“This is great news for a homeowner. We are in the process of refinancing a thirty-year fixed rate mortgage at 3.6%. The interest, of course, is deductible at the federal level. So after taxes the rate, on a net basis, is less than 3%.
“According to the American Automobile Association, the average car costs about $9,000 a year. That includes about $3,500 in depreciation, as well as $5,500 in fuel, insurance, maintenance and so on. It seems a little high to me. But it’s hard to see how you could run a car for less than about $4,000 a year, including depreciation. Two cars: $8,000. This is lowballing it. And I think over the long term fuel costs are probably heading higher.
“It produces some fascinating numbers. With current mortgage rates, $8,000 a year would pay the net interest on a $275,000 mortgage. In other words, in very crude numbers, if we moved out of the city we’d have to find a home for $275,000 less than our current place in order to break even.
“The difference may not be quite that big. Let’s say we spend about $2,000 a year on rental cars or Zipcars. That still leaves a gap of about $200,000. We’d need to save more than that in order to make the move work.
“I mentioned the Internet. It’s an ancillary factor. I grew up in the countryside. It’s a very convenient life when you can drive everywhere. But the rise of online shopping has eliminated that disadvantage of urban living as well.
“Naturally there are some complicating factors. The numbers only work if you itemize your taxes anyway: Those of us who live in high income, high cost states generally do. And there are other reasons to live in a city or the countryside. Many people will make their decisions based on quality of life. But it’s intriguing to realize that the sticker on the price of city real estate is misleading. It is about as cheap, or cheaper, than living outside the city.”
We realize there are other factors such as schools and where people actually work, but we wanted to pass this along as good food for thought.
If you have thoughts or feedback on this blog, please let us know. You can email us here!