0000 Sprint 12:59 PM * 94% Done Stedman Case Study.pdf For the exclusive use of
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0000 Sprint 12:59 PM * 94% Done Stedman Case Study.pdf For the exclusive use of R. Ehnisz, HARVARD BUSINESS SCHOO L 9-207-063 Stedman Place: Buy or Rent? When Beth Linton read the letter from her landloed in July 2006, she was more than a bat surprised. He had written to inform Beth and her hushand. Jon, that he was raising their rent from 53,000 a month to S3,600 on the townhouse they rented at 12 Stedman Place in Newton, a western suburb of Boston, Massachusetts. He pointed out that the 20% increase, while large, had followed years of very modest, if any, rent increases. With house prices rising so dramatically in the Boston area (see Exhibits 1 and 2), he had to raise the rent to make it worthwhale to continue to rent out the townhouse; otherwise, he might as well sell the property. However, the landlord had commited in his letter to raising future rents by no more than overall inflation as ong as the Lintons chose to rent. Beth and Jon had lived at 12 Stedman Place for the last two years. They liked being outside the city, yet within easy commuting distance to downtown, where both worked-Beth as an associate at a big Boston law firm and Jon as a new third year resident in general surgery at one of the Hanard teaching hospitals. As much as they liked the townhouse, Beth and on struggled with how to respond. Should they bite the bullet and pay the extra S600 a month? Should they look for another home to rent? Or should they consider berying. After all, Beth's father had always been an advocate of homeownership. "Don't throw away money on rent when you can buy a house and build equity he would frequently argue. Indeed, he had done very well over the years investing in real estate Luckily, Beth and Jon did not have to look far for other options. The nearly identical townhouse next dooe at 14 Sbedman Place was on the market for $620,000 t too had three bedrooms and bwo bathrooms, a state-of-the-art kitchen, and a deck overlooking a small yard. Initial inquiries with the listing broker revealed that it would likely cost them no more than S600,000 to buy. But was it worth buying Woald owning a $600,000 home end up costing them more than renting their current home for $3600 a month To help them think through this decision -certainly the biggest financial decision they had ever made- Beth and Jon consulted their accountant, Sasan Koster At the meeting, Kosber reviewed the costs of homeownership. Mortgage. The Lintons would need to make a down-payment, which Koster should be at least 20% of the purchase price. Beth and Jon presently had savings of $150,000 that they had invested in treasury bonds with an appeoximate maturity of five years. These bonds were yielding 49% per annum on pre-tax basis. They would have to sell S12000 worth of these bonds to fund the down-payment, which would leave them with a nest egg of S30,000 Kosber recommendedExplanation / Answer
This is a famous case-study. Here are some important points one need to consider to answers the questions 1 through 5.
Ans 1
Financial benefits of home ownership
The cost of purchase is one-time. No worries for monthly rent. If you consider a 30 year time-scale,
the financial commitment for rent will come more than the purchase.Owning a home may give income tax benefits.
Purchasing home increases personal wealth once the home- loan is paid. It also helps in building up equity.
Finantial benefits of Renting
For rented house, one need not have to bother about issues like maintainance, home insurance, property tax, sell
price & mortgauge. No liabilities.Renting helps in getting more leftover cash each month.
Nonfinantial Benefits for of home ownership
One will have the freedom to alter, arrange the house, the garden , fittings etc as one wishes.
Non-Finantial benefits of Renting
Need not have to take the pain of maintainance. Calling the plumber or carpenter will be owner's responsibility.
Has the freedom to change the house without much liability.
Ans 2
The finantial costs of home ownership
i. Price of purchase
ii. immediate downpayment
iii mortgauge
iv. closing cost
v. property tax
vi maintainance
vii. Home insurance.
The non- finantial costs of home ownership
To meet the loans, mortgauges many personal sacrifices have to be made. Cut on eat-outs, shoppings
are often quite hard-pressing. Left-over cash will be very low.
Finantial Costs of Renting
i. The monthly rent
ii. The annual hike in rent
Non-Finantial Costs of Renting
No freedom to alter, arrange the house, the garden , fittings etc as one wishes. Compromise with the
house-owner's choice of living room etc.
Ans C
Cost comparison for renting 12 Stedman Place vs Purchasing 14 Stedman Place
Expenses for purchase:
i. Downpayment = $ 120,000
ii mortgauge= $ 480,000 +interest
iii. closing cost= $ 4500
iv. property tax= $ 5600 +
v maintainance= $ 6000
vii. Home insurance=$ 1200 + 5% increase p.A
Expense for renting
Annual rent=$ 3600*12=$ 432,00
Ans 4
From the given data, assuming the LIntons are well off to meet the finantial stress to buy the house,
purchasing the house will be a challenging yet beneficial decision over a 30 year time scale.
The calculations show, Lintons do not have to pay any additional capical gain price.
Now, if we consider the July 2006 case, the price of the property is expected to increase by 6%. However, S& P
case and Shiller index study of next 5 years is showing a depression ,though they predict different selling prices.
This is a matter of concern indeed. So it might be safer to not to purchase immediately.
Ans 5
The two indices give different results as they use different methodology. The S&P case/Shiller index
measure the change in housing price at constant quality including the non-conforming loans and pay more
weightage to high-priced houses.The FHFA index
measure the change in housing price at constant quality without including the non-conforming loans and pay equal
weightage to all houses.
For the purpose of tracking house prices, FHFA is a better choice
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