Real estate agents always are saying, "There has never been a better time to buy a home." I am not a real estate agent, and I believe that there are some times when buying a home is not a good idea. However, as an economist surveying the outlook for 2001, it seems to me that the financial case for choosing ownership over rental is unusually powerful.

If you bought a home a year ago, it may have cost you almost nothing the first year. That may seem like a preposterous statement, given the amount of money you had to put down and the burden of the monthly mortgage payments. But there is a good chance that your net worth is higher than it was a year ago, because the increase in the value of your house exceeds your after-tax mortgage expense.

Below is the balance sheet of hypothetical homebuyers the day after purchasing a $100,000 home with a $20,000 down payment and a 6.5 percent mortgage rate [in June 1999 rates had moved up to 7.25 percent], assuming that they have the entire first year's mortgage payments of $6067.85 in the bank:

Next, consider the balance sheet after one year of mortgage payments, assuming that the house appreciated in value by 5.5 percent and the person is in the 20 percent tax bracket:

Note: The "opportunity cost" is the interest that would have been earned on the down payment had the person not bought the house and instead put the down payment into interest-bearing securities. (I assume a 5.2 percent after-tax interest rate.) It is a good idea to include the opportunity cost in the calculation, in order to avoid exaggerating the benefits of home ownership.

What you should notice is that our homebuyers' net worth actually went up during the year, even though they paid out $6,068 in mortgage payments. That is the sense in which they lived in their house for free.

In general, suppose that your mortgage rate is 6.5 percent. Because mortgage interest is tax deductible, for most people the effective after-tax mortgage rate is reduced by 1/5th or more. So the after-tax rate is 5.2 percent. [Using the mortgage rate in early June of 7.25 percent, the after-tax rate would be 5.8 percent] Using our all-purpose formula, the rental rate on the house is equal to the net interest rate minus the rate of house price appreciation. Various measures of house price appreciation for 1998 indicate that house prices rose somewhere between 2.9 percent and 5.5 percent. 2.9 percent is the rate at which the Commerce Department fixed-weighted price index for new construction rose over the latest four quarters. 5.5 percent is the amount by which the conforming loan limits were adjusted, based on indexes of home price appreciation used by the Department of Housing and Urban Development.

Using the more generous figure, the rental rate last year was negative: 5.2 percent minus 5.5 percent = -0.3 percent. That is, if you owned a home last year that appreciated at a 5.5 percent rate, then the capital gain on your home exceeded your interest cost, so it was like living rent-free for a year. That is what the two balance sheets above showed.

Even using the conservative 2.9 percent figure for appreciation, the net interest rate was 5.2 percent minus 2.9 percent, or 2.3 percent. This means that your rental cost on a $100,000 home was $2,300 a year (2.3 percent of $100,000), or less than $200 a month.

The outlook for 2001 is for another year where homebuyers will enjoy far lower housing costs than renters. Mortgage rates still are below 8 percent, weighted down by the deep recession in Asia and the general slowdown in inflation around the world. Home price appreciation appears to be accelerating. If you go to the rent vs buy calculator and plug in 3.5 percent for house price appreciation, chances are that the result will be "strongly advise buying."